Governance within superannuation funds

A roundtable conducted during CMSF discussed whether rules that apply to publicly-listed companies should also apply to superannuation funds.

Mike Taylor, managing editor, Super Review: I will change the topic a bit, and in fact it relates to something Fiona said yesterday at the opening plenary, which was the make-up of trustee boards, and the question of whether the same rules that apply to publicly-listed companies ought to apply to all superannuation?

I knew it was a compelling question and I heard what Fiona had to say and I know what drove what she had to say, but I’d like to know what the panel thinks of the general view, particularly, I guess, being put out there by the FSC with their latest issuance.

What is the view of the panel on the make-up of the boards? Should uniform rules apply across companies and superannuation funds, or do superannuation funds stand as something which are distinctly different?

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Fiona Reynolds, CEO, Australian Institute of Superannuation Trustees (AIST): Well, superannuation funds are different from public companies. While public companies have got corporations law and we have corporations law, we’ve got SIS and we’ve got trust law. That makes the regulations different. 

What often comes up about trustees is that they are not independent, but when you are taking about the ASX, and you are talking about companies, the whole concept of independence is being independent of management.

The directors of funds in the not-for profit sector are independent of management.

They are what you would term in a public company space, well, non-executive directors. 

So people are trying to fit the rules around public companies around here. Now the principles should be the same but the laws are different, and people shouldn’t confuse the two.

But absolutely, I think the principles of good governance should apply across all elements of every kind of business and superannuation front.

Peter Beck, CEO, Pillar Administration: I’ll just make one point which is, I think, what makes super unique – the fact that we hold money in trust for other people.

And just with my background in life insurance, life insurance is very similar to that, so fundamentally I think it’s hard to argue that superannuation and life insurance regulation shouldn’t be similar.

I think there is an argument about life insurance or money being held in trust and public companies, that they are two different levels of governance. Now having said that, when you have money in trust for someone, you actually need a higher level of governance, not a lower level of governance.

John Quessy, trustee, NGS Super: I don’t look past the sole-purpose test, and that is that if you’ve got to act in the best interests of members you’ve got to know the members.

Bringing someone onto a board who has no particular background with the membership, who doesn’t know what their aspirations are, who likely doesn’t even know what their earnings are, who doesn’t know the pattern of their work or anything else – if these are relevant things, and in our industry I think they are – then how does that help anyone?

Fiona Reynolds, AIST: That’s right, why do you want to have people who are independent?

John Quessy, NGS Super: Because independent, disinterested, well I don’t want someone who is disinterested.

Fiona Reynolds, AIST: Independent of your membership, why do you want to be independent if you…

Russell Mason, Deloitte: Well you assumed John, I have to disagree with you, you assume their disinterest. One would assume that if someone is coming on the board of a company or a trustee, that they are going to be interested persons.

Secondly, all that information can be found out.

If you or I went on the board of a body that we weren’t familiar with, I’m sure the initial time we’d spend doing research learning as much as we can, and there’s analytics, there’s data out there that would help you understand.

John Quessy, NGS Super: You are still fixing something that isn’t broken.

Fiona Reynolds, AIST: Yes, and I think in the superannuation industry what we need to be able to have are the principles and flexibility. Some funds work perfectly well with no other directors except those appointed on the employer and employee side.  Some funds…

John Quessy, NGS Super: By the shareholders.

Fiona Reynolds, AIST: Some funds choose to have independent directors, and if they want them and need them they should be able to have them and it should be encouraged.

But I don’t think there should be some rule that says every fund must have one independent director, or two independent directors, or let funds working with the regulator decide what are the skills the board needs?

Do the people that are on the board have them? Can we get them through this mechanism, or do we need to do something else?

A lot of funds don’t just use the board to bring in different skills, they use their committee processes.

So if they say, “well, we think we need some more particular skills in investments”, they might bring in some other people to be in the investment committee, or equally the administration committee, or something like that. 

I’m not saying that our sector can’t do better, we can always improve what we are doing, but it’s pretty hard to argue that our system of governance doesn’t work when we are the top-performing sector year after year, decade after decade.

So I think people need to show evidence, compelling evidence of the need for some radical change, and that evidence doesn’t exist.

David Haynes, consultant, AIST: And I think it’s very telling that there isn’t an argument, a public argument, or hasn’t been much of one about the composition of retail superannuation fund boards where almost to a man and a woman the representatives on those boards are employees of the parent financial institution.

I suspect that in a lot of cases they have got KPIs to maximise the profit of that parent financial institution. I would suggest that there is a conflict that exists there between that responsibility as an employee and their parallel responsibility as a trustee of a superannuation fund.

Peter Beck, Pillar Administration: You don’t see too many superannuation funds going to the wall, but a hell of a lot of public listed companies do from time to time.  I would be interested in your views on that, Russell.

Russell Mason, Deloitte: And I agree David, and I think just because reform is suggested in one sector, other sectors shouldn’t be excluded. I agree with you, I think in the retail space there are clear conflicts of interest that need to be addressed.

I think we, in the wholesale industry, have to be careful however about the perception out there, and that we are fighting back against something that might not necessarily do any harm.

I’ve been involved with a number of funds that have got independent directors, and certainly it hasn’t detracted from the performance of the board.

So if I’m a member of a fund, do I perceive that having an independent there gives me a bit more security? Perhaps, someone who hasn’t got a vested interest on either side.

As I say, with the funds I’ve seen there are a number that have got independent shares that works well, or an independent director who brings a set of skills that doesn’t exist on the board.

At the same time I agree with you, a reform of the entire superannuation industry, including all sectors, retail, is something on the government sides of things that the government needs to look at. I do agree with.

Peter Beck, Pillar Administration: I think we are singing off the same hymn sheet. The life insurance companies too, just to make sure they don’t get missed.  

Life insurance companies always have had independent directors, for a number of years now. I don’t think the superannuation funds, their responsible entities, have got independent directors in retail – I think that’s what you were talking about.

I know there’s a move, and I don’t think the retail funds are resisting putting independent directors…

John Quessy, NGS Super: Some retail do have independent directors, there’s a mixture and I know some out there do. It works well, it would be nice to see it …

Peter Beck, Pillar Administration: Absolutely independent is the wrong word, when we talk about this and get emotional. It’s about conflicts, so maybe the definition needs to be turned around and to talk about directors who are not conflicted.

John Quessy, NGS Super: There’s an assumption that there’s a conflict, or a conflict of interest.  If there is example of that I want to see them.  No one’s been able to produce them.

David Haynes, AIST: There’s the issue in retail, where the executives or directors of a company are conflicted…

Peter Beck, Pillar Administration: I was suggesting that if NGS Super, for example, said, ‘We are going to change our board and it will be made up of the CEO, who will also be the chair, and the operations manager will be a trustee, and the marketing manager will be a trustee’, there would be an enormous hue and cry.

And that’s exactly what happens in the retail sector, it’s somewhat…

John Quessy, NGS Super: So it’s probably the retail sector that needs reform?

It’s not this sector?

I mean, we have the capacity, and sometimes some industry funds have done it, to either appoint independent chairs or other directors – and as Fiona said, to pick up perceived missing skills at an investment committee level, if that’s where you think you might be lacking, or insurance, or whatever it might be.

Those capacities exist and are utilised by some funds from time to time. If it works for them, that’s great, but what I fear is happening is that there is a situation where, “you did this and it was really good, therefore we are going to make it compulsory for everybody.”  That’s dumb.