Governance and choice - distractions or prorities?

Are the continuing debates about super fund governance and choice of fund serving to be a distraction to the greater objective of agreeing a purpose for superannuation? Thisi s part four of a roundtable.

Mike Taylor, editor, Super Review: Well change of pace, but no less controversial, super fund governance. I know ASFA has a definitive position on that. You know, sometimes the suggestion is made that the Government went down this path to pick on industry funds, they may I don’t know, I’m not in the Government. Russell, what’s your view? 

Russell Mason, partner, Deloitte:  Thanks Mike. 

MT: It’s called a hospital pass Russell. 

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RM: Yeah hospital pass. Let me make two comments. One, I think the system works well. Now I haven’t seen any great abuse of the system with the equal representation that we’ve seen now in industry funds. However I think having one-third independence at least on boards is inevitable. 

I think there’s evidence with respect to public confidence, of perceptions. We have generally very good trusteeship of superannuation funds in Australia. The Trio type instances are few and far between and even when you see companies like Ansett and HIH go down, the super fund assets were by and large intact. 

So I think the system works well. However, a number of funds have already adopted independent trustees, whether that’s a third or something less, and its working. You’ve seen a couple of industry funds now have one third independents, and my experience with working with one of those is it works well. So I would say to funds, let’s accept that it’s inevitable we’ll have at least one third and embrace it, and now let’s go and look for the right sort of people to add to the board to make sure we’ve got diversity in views, in demographics and all that so that we can bring the best thinking to trustee boards. 

MT: Glen? 

Glen McCrea, chief policy officer, Association of Superannuation Funds of Australia: Yes certainly agree with Russell’s comments on diversity, and obviously ASFA have the position of one-third. I mean look, there’s no doubt this is an issue that’s very passionate across industry, there’s some pretty strong schools of thought but we have taken the position that one-third is a reasonable number. I think a lot of the debate has also occurred about the legislation, and I think some of the key issues with the legislation is trying to get that definition of independence right, because obviously that will drive what governance looks like going forward.  

I think the other key issues here are requirements for if not why not a majority of directors, and given a requirement is to have a third, it doesn’t seem to be consistent with the purpose of the legislation as introduced. 

Then, obviously, there’s the equal representation, and I know that is fundamentally historically an important part for a number of funds, and I think some sort of recognition of that in the legislation is something that would be worthwhile. 

I think governance has probably got a way to go, I think the conversation’s just started, and I think just leaving it at a third is probably the start of the conversation, because clearly as an industry we’ll be scrutinised for our governance going forward. So you know I think that’s probably the next conversation going forward. 

MT: Jocelyn? 

Jocelyn Furlan, Furlan Consulting: I really can’t comment, because I’m a trustee director. 

MT: You can comment. Please Jocelyn. 

JF: I really can’t comment, because I’m a trustee director. 

MT: Well there’s a lawyer’s answer. Andrew? 

Andrew Boal, managing director, Willis Towers Watson: Look I think there’s, to my thinking there’s three things that are really important for a trustee director. The first one is fit and proper, which is already - well they’re all really there. You need to have the appropriate expertise and experience to perform the duty. The second thing then is to have diversity of thought, and that’s been mentioned twice already. 

The final thing which Gonski has talked about a number of times over the years is around independence of thought. Not necessarily independence of the appointment process, but the independence of thought, and David Gonski’s always been a firm believer that once you walk into that room, any boardroom, that your responsibility is for that role and you all must have independence of thought, not just one small group of directors sitting over here in the corner. 

So I think all directors need to be encouraged to have independence of thought to act in the members’ best interests. So I’m not a big advocate for requiring minimum numbers of people to be appointed in a particular way. If you’ve got a room full of people who are doing all of those things - it’d be really interesting to find out exactly what decisions some boards have made that have been harmful for their members that we’re trying to protect against.  

MT: Ange? 

Ange Calvitto, Northern Trust: Yeah, look there is two sides to this, and ultimately doing something, if there’s either a problem - so if you’ve got a problem, and if it’s a systemic problem that you want to fix, then this is one way to do it. I don’t think we have that. I think we’ve all agreed we have a great system, it’s world class, all of that stuff, et cetera, et cetera. There’s enough research and analysis that tells us that diversity in any decision making authority, delivers a better outcome. 

So the system is good. Can we make it better? I think we can. Your point Andrew, I agree, you know does it have to be that there’s one, two or three independent? I mean that’s a matter for debate as well. But independence from the day to day entrenched view - research has shown us that it brings value and you get a better outcome. For that reason alone, it’s a positive step forward. 

MT: Moving it on, but still onto the areas of contention, the Government is also talking about default funds, as it has for a long time, and there’s the view that the industrial relations judiciary ought not be involved in superannuation because they simply don’t really get it. They may or they may not. I actually know a former industrial commission judge who seems to get it perfectly well. But anyway. Jocelyn, industrial judiciary, should it be involved in super? 

JF: I think I would make a preliminary comment and say that this question and the last question are things that we’ve been having conversations about for a long time. Part of me wishes that those who can make decisions about these things would just get on and do it so we can have a community conversation about the purpose of superannuation. Because I think both of these issues, we’ve got a number of round tables where these have been raised and both of them are such a distraction to what we’re trying to do, which is to improve the adequacy of retirement incomes for the members of super funds in Australia. So having said that, so I kind of wish this conversation would go away. 

But I think there is a real issue about what the system looks like if some of the protections are taken away, where you’ve got funds that do other things as well and can use their superannuation fund as a loss leader for something else, and can actually influence employers to join a fund not because that fund is right for their employees, but because there are possibly ancillary benefits because it’s a big retail organisation that has other financial relationships with that employer.  

So I think as long as the debate includes a recognition of that, and that it must be about which is the best superannuation fund for that group of employees as a group of members of a superannuation fund and not extraneous things. I think if that’s protected then I think we can remove some of the protections that actually for mine, actually counter that potential. But I don’t know how engaged employers are with actually wanting to find out enough about super funds to work out which fund is best for their employees, I think that’s maybe the piece that’s missing. 

Employers are really important in this story, and yet we’re talking about funds, industry funds, and default, and it seems to be the debate around the risks of cross-subsidisation with other financial products and all that sort of stuff. But for me we have to have a member lens when we have this conversation. 

AB: I’ve been involved in advising a lot of companies over the years, and it goes into this area, and for whatever reason they’ve always been very engaged with superannuation and making a good choice for their employees, and doing the right thing. But there are, as you suggest, some that possibly haven’t. So once again looking at what’s harmful to the best interests of employees or members, if you’re going to open it up to every product, and the employer gets to make the choice, then there needs to be protection and proper penalties in place to ensure that employers are encouraged with a carrot and a stick to do the right thing. 

RM: That exists today Andrew, that’s there today. Let’s be realistic, why was this put in a number of years ago? Because there were high commission products. There were all sorts of products in superannuation which were completely inappropriate where members did get short-changed by some employers, and probably not that many, because as Andrew said you know most of the ones we deal with are quite reputable members of ASFA. You know, are very reputable. But there were some bad products. 

They [the high commission products] have largely gone, in fact I think they’ve all gone, because MySuper has set the bar at a certain level. APRA have really regulated what’s an acceptable superannuation fund with the MySuper licensing my view is that that should be enough - that if they’re eligible under the MySuper license then they should be eligible to be considered by an employer as a default fund. 

It’s up to the individual funds, retail and industry, to sell the merits of their fund to employers. Again, you know, the industry funds, to their credit, have been doing that. Most haven’t just been sitting back on their laurels and saying we’ve got employees locked in because of an Award system, they go out there, they sell themselves to the employers, they sell themselves to the members. I think that’s a healthy competition, and if that exists and APRA are doing their job, which they well and truly appear to be doing in ensuring that the My Super requirements and other licensing requirements are met, then I would have thought that’s a good enough system. 

AB: That’s a really good point you make, that most funds, if not all now, have representatives who service members, and representatives who service employers, and to make sure that employers feel a part of the whole game and feel comfortable that their employees are being looked after in that fund. 

RM: Yeah and I’ve been to a couple of industry fund breakfast functions for employers recently and I’ve been very impressed at the effort they’ve put in to engage with those employers, to not take them for granted, and say well you’re locked in under an industrial award - to really make life better for the employer, sell their benefits. I think if we see that continuing super can come out of industrial Awards. 

MT: Glen? 

GM: Yeah look I think quality is one of the things I think we need to think about, and the reality is the Productivity Commission are going to do a review again, obviously into this area. I think one thing they need to think about is what we’re trying to achieve by looking at this; thinking about what the system looks like in terms of quality, and I think they’re going to have all the options on the table including the Fair Work Commission. 

I think we’ve got a long way to go. I might say in a slightly different way, obviously you know it’s again a bit like governance, it’s a patched issue in the industry. I just hope the industry isn’t so distracted that they focus on that for the next couple of years and don’t think about some of the big picture system issues such as taxes, the purpose of the industry. 

I know this debate’s going to occur, and it will probably occur in the minimum next couple of years but I really hope the industry as a whole just thinks okay let’s have this discussion in a mature fashion, but let’s not lose sight of some of these bigger issues, and it’s all about the member retirement outcomes. 

MT: Ange? 

AC: I really don’t have a lot to add. I would agree with everything that’s been said. My position again is if there is a problem identify it, and then you’ve got a regulator to deal with it, penalise. But let’s not blanket the whole industry or you know say that there’s an issue across the whole industry when I don’t think there is. But there are... 

JF: That’s such a good point, for both this and the previous issue. What is the problem we’ve got to solve? 

AB: Look, I think it was Russell’s point earlier as well, is that My Super products are now highly regulated and I think it’s only been a couple of years, and I think over the next few years they’ll continue to be refined. You know it’s a bit like the technology sessions yesterday, like the first time you do something it won’t be perfect. Over a progressive number of years it will get better and better and better. So if we take that as a given, then this problem will become less and less and less important over the next few years. 

RM: I think what we also need to do as part of this is reform that large section of the workforce that are locked in under enterprise bargaining agreements. Because I think choice of funds is the other key to this. 

Many EBAs exist that lock people into funds. I think you’ve got to give everybody choice. If people have choice I think we should give people credit that they can understand the products. 

Part one: Giving super a purpose

Part two: Sharper targeting of super tax concessions

Part three: Super millionaires - more fiction than fact