Independence vital for superannuation trustees

Superannuation trustee governance has become a hot political topic. Barrister Noel Davis examines the issues and argues there is no basis for differences between retail and industry super funds.

The governance of trustees of superannuation funds has become a contentious issue. It has been argued that governance should be improved so that there is a similar standard to that which applies to listed companies.

Amongst the increased standards being suggested is that trustees should have a majority of independent directors, that the chair should be independent and that there should be disclosure of directors’ fees and remuneration of executives of the trustee.

Currently, there is a significant difference between the governance of retail and industry super funds. Both models have issues that need to be addressed. 

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Retail funds operated by financial institutions generally have executives of the institution as directors of the trustee, with – in some instances – some independent directors.

Industry funds usually follow the equal representation requirements of the Superannuation Industry (Supervsion) Act (SIS Act) by having an equal number of employer and member or union-nominated directors.

Such a difference in determining directorships does not make any sense when both types of funds are generally on an equal footing, in that membership of both is offered to members of the public.

The reasons for the difference in approach are essentially historical, but are no longer relevant.

Under the SIS Act, a fund that is offered to the public has to either comply with the equal representation requirements or have an independent trustee.

Retail funds operate under the ‘independent trustee’ retirement, with the consequence that they are required to form policy committees for many of the employers that contribute to the fund.

Such policy committees must comply with equal representation requirements, but have been notoriously difficult to form and manage.

Employer policy committees are supposed to advise the trustee on issues that relate to members employed by that employer, but everyone in the superannuation industry knows that policy committees have been almost entirely ineffective.

They are not, therefore, an appropriate means of providing equal representation in retail funds.

Another issue with the way in which the directorships of trustees of retail funds are organised is that any executive of the associated financial institution who is a trustee director has a conflict of interest in dealing with the investment made by the trustee in an associated company, and with issues that arise under an insurance policy that the trustee invariably has with an associated insurer.

For example, if the associated insurer has rejected a disability claim, the executive has a clear conflict in determining whether the trustee should take issue with the insurer’s decision. Directors with such a conflict of interest should not participate in deliberations on the matter. 

Of course, conflicts of interest can also arise on the part of directors of industry funds. Sometimes they invest with associated entities of the trustee.

Directors with a conflict of interest should not participate in decisions to make such investments. Directors may also have conflicts in relation to other service providers.

In relation to the equal representation model that most industry funds follow, it can be well argued that, because of the effect of the choice of fund regime, the public offer status of most funds and the responsibility that trustees have to fund members, it is no longer relevant or appropriate to have employer representatives on trustee boards.

It is also arguable that, as all trustee directors are required by the SIS Act and trust law to act in the best interests of members, it is no longer necessary to have member representative directors. 

Some attempts have been made to bring about reform.

The Super System Review (the Cooper Review) recommended that equal representation on trustee boards should no longer be mandatory. That recommendation has not, at this stage, been taken up, but the government is considering what legislative changes should be made. 

The Cooper Review also recommended that, if there is not equal representation, there should be a majority of non-associated directors in the sense that they shouldn’t be associated with sponsors of the fund.

A further recommendation was that, if there is equal representation, one-third of the member representatives and one-third of the employer representatives should be non-associated people.

The Financial Services Council, which represents retail superannuation funds, has adopted a policy that, from 1 July next year, its members’ funds have an independent chair and a majority of independent directors.

That development is commendable, but it would still permit executives with the conflicts of interest referred to above, to be directors.

However, where they have a conflict, at least there will be a majority of the board, the independent directors, who can participate in voting on the decision. The two-thirds majority requirement of the SIS Act may require reconsideration in light of this development.

Conclusion

For the reasons stated, there is no logical basis for the existence of the current differences between retail and industry funds in the way in which their directorships are organised. The applicable legislation for both models is in need of reform.

Some of the areas that need to be addressed are:

• There needs to be consistency in the requirements that apply to both retail funds and industry funds.
• It is not appropriate to have employer representatives in funds offered to the public.
• At least a majority, and arguably, all of the directors should be required to be people who are not associated with service providers and who don’t, therefore, have conflicts of interest in making investment, insurance and other decisions.
• The chair should be independent to ensure, amongst other things, that all relevant issues come before board meetings.
• Policy committees have never been an effective means of providing equal representation and are, generally, pointless.

Noel Davis is the author of The Law of Superannuation in Australia and is the editor of The Australian Superannuation Law Bulletin, both published by LexisNexis.