Opening statement to Senate Economics Legislation Committee Inquiry into Superannuation Legislation Amendment (Trustee Governance) Bill 2015

Posted: Wednesday 28 October, 2015

Opening statement by David Whiteley, Chief Executive, Industry Super Australia to the Senate Economics Legislation Committee Inquiry into Superannuation Legislation Amendment (Trustee Governance) Bill 2015

***Check against delivery***

Thank you for the opportunity to present to the Committee.

Industry super funds support effective governance measures aimed at a strong culture of accountability, integrity and prudent risk taking. Industry super funds support the appointment of "independent" trustees where required. Over half of industry super funds have one or more independent trustees.

Indeed, Bernie Fraser, the voice of industry super for many years, was an independent trustee.

Not for profit trustees are drawn from was diverse range of real-economy industries and professions. They are not beholden to a parent entity or to a broader business, and independent of the management of the fund. They have a single-minded purpose to maximize the super savings for their members.

The representative trustee model is the prevailing model of pension fund governance across the OECD.

In Australia, when it comes to the real test – returns to members – not for profit and industry super funds have delivered better returns.

According to:

  • SuperRatings (performance of major balanced options,10 Year % pa to 30 September 2015)
    • Industry 6.0                        Retail 4.5                              Difference 1.5
  • Chant West (investment performance 15 year % pa to 30 September 2015)
    • Industry 6.9                        Retail 5.5                              Difference 1.4
  • APRA (Quarterly Statistics sectoral net returns 10 year % pa to 30 June 2015)
    • Industry 6.5                        Retail 4.8                              Difference 1.7

Industry super and other not for profit funds have also been immune to the scandals that have dogged the banking and wealth management industries.

THE HISTORY OF THIS BILL

In the explanatory material for the bill it is argued the reforms are consistent with the Cooper Review and Murray Inquiry – and therefore there is a sound basis for proceeding.

We would disagree with this proposition for two reasons.

First the proposals in the Bill do not faithfully adopt the recommendations of these reviews.

For example, the Bill does not adopt the Cooper Review recommendation to adopt a modified equal representation model in the not-for-profit sector (third/third/third), and to introduce different governance requirements in respect to retail funds (majority) to overcome the misalignment of interests between fund members and dominant, profit seeking parent companies. Murray suggested aligning to the ASX framework which super funds invest in, but the bill deviates substantially from that.

Secondly, and more pertinently, neither of these reports provided an evidentiary basis for their recommendations.

The Committee may not be aware that the Productivity Commission in its 2012 review into superannuation defaults considered in detail the evidence around superannuation governance including quotas of independent directors and concluded there was no compelling evidence to support one model of governance over another, and recommended against prescribing any particular structure for superannuation fund boards, suggesting instead that the governance reforms contained in the Stronger Super Reforms be observed before reviewing the matter further.

The Productivity Commission has a fierce reputation for its rigor and ignoring its important contribution would not be a sound way to proceed.

In terms of our specific concerns with the bill:

THE BILL IS AT ODDS WITH THE GOVERNMENT’S STATED OBJECTIVES

One of the government’s objectives is to better align fund governance with the ASX approach. However, the prescriptive approach of the Bill and unprecedented powers proposed for APRA are inconsistent with the principles based approach of the ASX.

Equally inconsistent is the proposed mandating that at least one third of trustees should be independent. We agree with the AICD and Governance Institute that mandating a governance model is inferior to a principle based approach, a conclusion reached by Justice Owens following the HIH Royal Commission. To lock the super industry into a rigid model is unnecessary and counter to governance principles in other APRA-regulated entities such as banks.

The bill is intended to build diversity on boards, but will do the opposite. Currently industry super funds directors are drawn from all walks of life, but by virtue of an association with a union or employer body deemed to be from the same gene pool. Yet four in five directors from bank owned funds are finance industry insiders.

THE OVER-REACH RISKS MEMBER RETURNS

The Bill does not just require that not for profit funds appoint one third independent trustees. It dismantles the governance structure of the entire sector imposing a single model of governance on two distinct sectors, scrapping the equal representation system and the two thirds voting rules from law and proposing an “if not, why not” approach to imposing majority independents. The Government has yet to explain its rationale for this over-reach.

The Committee has heard numerous witnesses expressing concern about elements of the over-reach in the Bill, including the AI group, the ACTU, Professor Clarke, Professor Rafferty, AIST, ASFA, Mercer and the Business Council of Co-operatives and Mutuals. In particular there is support for the retention of the representative trustee system in the SIS Act.

These changes risk transforming the structure, character and ultimately the performance of the not for profit sector, whether deliberately or otherwise.

THE BILL FAILS TO ADDRESS THE REAL GOVERNANCE PROBLEM IN SUPER

We are equally concerned with what the Bill does not include. The Bill does not address the most significant governance challenge facing the super industry: the governance challenges of the bank-owned super sector - and whether and how for profit, bank-owned super funds prioritise fund members over the parent bank.

According to research papers published by APRA between 2008 and 2010, the conflicts of interest embedded in the retail and bank-owned model are clearly to the detriment of members’ retirement savings. Higher fees, related party transactions at above market rates and executives sitting on the boards of funds all create agency risk and are ultimately identified as the cause of their historical lower average returns to members.

The Bill does nothing to address these known governance risks. 

More recently, the design of MySuper “low-fee” products by retail funds has raised eyebrows.

According to Chant West: “a move towards low-cost, substantially passive portfolios would have the effect of reducing net investment performance and, as a consequence, be to the detriment of fund members over the long term.”

SuperRatings also outlined concerns: “We are concerned that substantial profits are being made by some funds charging excess investment fees for their passive investment products. Whilst we believe there is a place for passive investment products, they must be appropriately priced to ensure that the net benefit to the member is reasonable and competitive.”

IBISWorld summed up the governance challenge thus: “It is only retail funds that generate profit to distribute to shareholders. Importantly, the operators of the retail funds (i.e. the major financial institutions) earn most of their profit through super fund support services such as funds management, financial advice and asset investment. Essentially, the fund is just a means to attract savings to earn money from.”

Credit Lyonnaise observed: “[We] are not analysing the wealth management arms of the bank because, in many ways, they sum up all that is wrong with the current system. OnePath (ANZ), Colonial (CBA), MLC (NAB) and BT Financial Group (WBC) contribute to the underperformance of the superannuation system, in that they are excellent at acquiring the customer (distribution) and rather less capable at serving them (manufacturing performance).”

The Bill does nothing to address these governance challenges. It is more concerned with board composition than fund governance. What the Bill would achieve, if passed, is to dismantle the structure and character of the industry super funds which stand between consumers’ retirement savings and the four major banks.

The quality of retirement for millions of Australians is dependent, in part at least, on the performance of their super fund. There is no room for ideology in superannuation policy. This Bill is a risk to the savings of millions of Australian workers, it should be rejected and the Government should seek to work with the super industry to improve the governance of the sector as a whole. 

Thank you.

For further information, please contact Phil Davey 0414 867 188

 

Delivered 28th October 2015