The Federal Government has re-opened the thorny issue of governance in Australia’s superannuation industry.
Its new discussion paper,“Better regulation and governance, enhanced transparency and imposed competition in superannuation”, threatens to once again reshape an industry already suffering reform fatigue.
In Australia’s superannuation industry the majority of ordinary investors rely on trustees to ensure their retirement savings are prudently managed. Considering its importance to the lives of most Australians, good governance in super is critical.
But what does good governance look like? It’s a question that’s already led to some of the most extensive reforms in superannuation.
The 2009/10 Super System Review (better known as the Cooper Review) held that better trustee governance means ensuring the right people are running superannuation funds and that these people are aware of their duties, understand how to manage conflicts, and are appropriately held accountable.
Good governance and the responsibility for ensuring all business risks are effectively addressed lays with the trustee’s board of directors, both individually and collectively.
While the Cooper Review found no material failure in trustee governance it did uncover a lack of coordination between the regimes under which trustees operate and attempted to address the gaps in governance including those impacting directors of a trustee company.
What followed were the Stronger Super package of reforms which sought to improve governance standards and give power to APRA to make prudential standards for the superannuation industry.
Changes were made to superannuation law to obligate directors of trustee companies to properly manage a fund and ensure the trustee acts in the best interest of beneficiaries.
New provisions for managing conflicts were also introduced as the Cooper Review identified that trustees have relationships (by way of employment, directorship or ownership) that cause conflict between the interests of members and their own associated interests.
The Review made recommendations to improve the independence of trustee boards, including that one-third of directors be non-associated (for equal representation boards) and that non-equal representation boards have a majority of non-associated directors.
Significantly, this recommendation was not adopted as part of the Stronger Super reforms leaving room for criticism the reforms had not gone far enough.
The Coalition Government now intends to review (again) the governance arrangements for superannuation fund trustee boards.
Board independence will return to the spotlight with the Government’s new paper calling for discussion on moving away from the equal representation model adopted by many industry and corporate superannuation funds. Under this model, half of a trustee’s board come from member representatives and the other half from employer representatives.
The move towards requiring a proportion of board directors to be independent raises several issues including the appropriate definition of ‘independence’ for directors, what could constitute the optimal board composition, the appropriate number of independent directors, whether the chair should be an independent director, the process for appointing independent directors, and how to examine the efficacy of appointing independent directors to trustee boards.
In addition, the Government calls for discussion on measures to strengthen the management of conflicts of interest, an issue already addressed by the Stronger Super reforms.
There are different views about what constitutes good governance in superannuation. This is evident in the different trustee practices adopted by retail and industry funds.
Retail funds typically operate in the commercial sector and it is a common practice for financial services companies which own the trustee company, to appoint directors from the executive of the institution and remunerate trustee staff and directors.
In contrast, industry, public sector and corporate funds generally draw directors from stakeholders such as employer-sponsors, fund members and unions. Remuneration practices vary for directors of trustee boards for industry, public sector and corporate funds.
APRA’s governance standard has deliberately allowed flexibility for trustee companies that is aligned to their size, business mix and complexity. And, despite the differences in governance models across the sector, studies show the majority of superannuation funds comply with the governance practices recommended by APRA.
How much is too much?
The Coalition’s discussion paper reignites the debate on which governance model is the best for superannuation in Australia.
While the intention behind the paper, to better protect people’s retirement savings, is indisputable, ongoing comprehensive reform of super is not without risk.
Achieving high standards of governance requires trustees to understand their duties and any changes that may flow from a new governance model.
In the midst of this new debate, a key question remains: What value is there in another superannuation review? And, given the Stronger Super Reforms are yet to be tested, should we be considering further wholesale governance changes to the superannuation system now?
Perhaps a more effective strategy for the government would be to work with industry to cherry-pick and focus on specific issues that will deliver the best improvements.