- On 16 December 2010 the government released its response to the final report of the Super System Review in a paper titled ‘Stronger Super’ (Report).
- In this article, we examine the responses set out in the Report to the Super System Review recommendations for trustee and investment governance.
- With some notable exceptions (including rejecting the Super System Review recommendations regarding the composition of trustee boards), the majority of the responses in the Report were to provide ‘in principle’ support for the recommendations for trustee and investment governance.
- Whilst it is difficult to determine at this stage which of the Super System Review recommendations will eventually be implemented, the Report does provide some indication as to the direction in which the government is moving on a variety of important issues.
On 16 December 2010 the Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, released the government’s response to the final report of the Super System Review, chaired by Jeremy Cooper.1 The government gave its detailed response in a paper titled ‘Stronger Super’ (Report).2
In previous articles we have provided an overview of the Super System Review recommendations which were not supported by the government’s Report3 and also examined in detail the key recommendations made by the Super System Review Report.4 In this update, we examine the government’s response to the Super System Review recommendations for trustee and investment governance, which were primarily discussed in Chapters 2 and 3 of the Super System Review’s final report.
The government’s response to investment and trustee governance recommendations
The Super System Review report contained 20 recommendations for trustee governance and six recommendations for investment governance. Although the government states in the Report that it ‘supports the objectives of the Super System Review’s recommendations aimed at heightening the obligations of superannuation fund trustees to manage their fund’s superannuation assets prudently and in the best interests of all members of the fund’, the Report did not provide outright support for the recommendations for trustee and investment governance. Rather, for the majority of recommendations the government provided ‘in principle support’. It will consult with relevant stakeholders or refer the recommendation to APRA for consideration before making a final decision whether to implement the recommendation. However, while it is difficult to determine at this stage which of the Super System Review recommendations will eventually be implemented, the Report does provide some indication as to the direction in which the government is moving on a variety of important issues.
Duties, ‘fitness’ and collective skill sets of trustee boards
The Report provided ‘support in principle’ for the Super System Review’s recommendations to:
- create a new office of trustee-director
- fully set out the statutory duties for trustee-directors in the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act)
- strengthen APRA’s administration of the ‘fitness’ test for trustees under the SIS Act, and
- require trustee boards to annually demonstrate that they have the collective skill set to govern the superannuation fund for which they are responsible through an independent annual review of the board.
While the government provided high level support for these recommendations, for example stating that it ‘supports the need for heightened trustee duties’ and the ‘need to strengthen trustee requirements [regarding ‘fitness’ to serve on a trustee board]’, it did not provide detail as whether it is likely to endorse specific aspects of the recommendations (for example, which of the recommended trustee-director duties it supports). Therefore, we will have to await the outcome of the government’s industry consultation before there is any concrete indication of the areas in which trustee boards will be required to meet more onerous requirements.
In addition, the government noted the Super System Review recommendation for the enforcement provisions of the SIS Act and the Corporations Act 2001 (Cth) (Corporations Act) to be reviewed and ‘an appropriate proportionate penalty regime [to] be designed to take into account the new duties imposed on trustees and trustee-directors’. The government stated that it will consider enforcement provisions at the time of undertaking any broader review of penalties.
Code of Trustee Governance
The government provided ‘in principle’ support for the Super System Review recommendation that a Code of Trustee Governance, developed by an industry council (or, if this cannot occur within two years, by APRA), be adopted. The Code will apply to both trustee companies and trustee-directors. The government stated that it supports best practice in governance through a voluntary industry code of governance and, where appropriate, prudential standards developed by APRA. The government says that it will consult with relevant stakeholders on design and implementation issues. It is unclear whether the government supports making it compulsory to annually audit a trustee’s performance against the Code of Trustee Governance (and for trustees to publish the results of that audit on the fund’s website) as the government stated only that it ‘supports transparency in trustee compliance with best practice governance’.
Therefore, it appears likely that a Code of Trustee Governance will be developed (whether by industry or APRA). However, the likely standards to be covered in the Code of Trustee Governance and the question of whether a trustee will have to publish an annual audit of its performance against those standards will not be known until a later date.
The composition of trustee boards
The government has indicated that it will leave the composition of trustee boards largely unchanged, rejecting a number of the Super System Review recommendations in the process.
- Equal representation on trustee boards
The Super System Review found that ‘equal representation no longer seems to achieve its original stated objective’ of participation by members ‘in the management and protection of their retirement savings’ because, among other reasons, there is no longer a close relationship between the place of employment and the super fund. The Super System Review recommended that equal representation on the board (and policy committees for public offer funds without equal representation) should no longer be mandatory.
The government has rejected this proposition, stating that the current arrangements continue to meet the original stated objective of equal representation and that policy committees remain appropriate for public offer funds where equal representation is not required. Therefore, the government will not be implementing any changes to the SIS Act regarding equal representation or policy committees.
- 'Non-associated’ trustee-directors
Likewise, the government has rejected the recommendation that a minimum number of ‘non-associated’ directors (which is not the same as an ‘independent’ director under the SIS Act) be required to serve on a trustee company board, stating that ‘the composition of a trustee board is a matter for the board to determine’.
The Super System Review final report strongly asserted that conflicts of duty and conflicts of interest in the superannuation industry have to be addressed. The government gave the following responses to the Super System Review recommendations on conflicts:
Click here to view the table.
In addition, the government stated that it will refer to APRA the need for trustees to have further guidance on managing conflicts of interest. Therefore, it appears likely that APRA will become active in providing guidance on managing conflicts of interest to trustees once they have ‘standards making’ power. APRA’s guidance may not be limited to the recommendations set out in the Super System Review’s report.
Despite the Super System Review recommendation, the government has shied away from requiring trustees to hold an appropriate level of indemnity cover as a condition of their RSE licence and to provide APRA a certificate of currency for that cover annually. The government’s reasoning is that trustees are already required by APRA to have a risk management strategy, which would include consideration of the purchase of an appropriate level of risk management insurance. As a practical matter, in our experience, APRA already requires RSE licensees to have a level of indemnity cover but that requirement is not expressly found in the SIS Act.
The government seems not to have considered that, while trust deeds are required under the SIS Act to provide an indemnity to trustee companies and their directors generally, if there is no external insured cover, it is members of the fund who bear the cost of the indemnity.
The government also rejected the Super System Review recommendation that the liability imposed on directors of trustee companies by section 197 of the Corporations Act should have no application to directors of trustee companies due to it being in conflict with the trustee indemnification provisions in sections 56 and 57 of the SIS Act. The government rejected this recommendation on the basis that it ‘sees no practical conflict arising’. Although it has stated that it does ‘not support’ this recommendation, the government will consult with stakeholders for clarity over its position.
Provision of reasons for trustee decisions
The government has supported the Super System Review’s recommendation for trustees to be required to provide reasons to a member for any decision in relation to that member’s formal complaint. However, the government indicated that it wanted to consult with stakeholders to determine a way to achieve this result which ‘balances the costs with the benefits’. Subject to the outcome of the consultation process, it appears likely that there will be increased transparency in future trustee decisions regarding member complaints. Initially we would expect that a trustee might incur some costs as it establishes a protocol for recording and providing reasons but, over time, those costs will decline rather rapidly. In fact, many trustees already provide members with reasons for their decisions regarding complaints.
Formulating an investment strategy
The government will consult with stakeholders regarding the Super System Review’s recommended changes to section 52(2)(f) of the SIS Act. Section 52(2)(f) deems there to be a covenant in the governing rules of a superannuation fund requiring the trustee to formulate and give effect to an investment strategy having regard to the whole of the circumstances of the fund, including certain factors set out in section 52(2)(f). The government has provided ‘support in principle’ for the recommendation that trustees must have regard to the following additional factors in formulating their investment strategy in accordance with section 52(2)(f):
- ‘the expected costs of the strategy, including those at different levels of any interposed legal structures and under a variety of market conditions’
- ‘the taxation consequences of the strategy, in light of the circumstances of the fund’ (and to ensure that trustees consider those taxation consequences when giving instructions in mandates to investment managers), and
- ‘the availability of valuation information that is both timely and independent of the fund manager, product provider or security issuer’.
We will have to wait until consultation with stakeholders is finalised before we will know whether this exact recommendation will be implemented. However, in anticipation of these changes a trustee may wish to review whether its investment strategy currently has regard to these factors and consider whether they should be included regardless of the government’s final position.
Performance fee standards
The Super System Review recommendations for the development by APRA of an enforceable ‘performance fee standard’, and a requirement that no performance-based fee can be paid by the trustee of a MySuper product unless the fee conforms with that standard, were the only governance recommendations which the government fully ‘supported’ (rather than supported ‘in principle’). The government stated that it will work with APRA and consult with relevant stakeholders on parameters under which trustees should be able pay performance fees to investment managers.
The government provided in principle support for the recommendation for large APRA funds to publish their proxy voting policies and procedures and to disclose their voting behaviour on their website. However, this is another area where the Report states that it will consult with stakeholders on the design and implementation of the recommendation.