Superannuation corporate governance and the push to improve standards

The quality and transparency of superannuation governance has become a subject of increasing controversy, with Financial Services Council members now moving to adopt new prudential standards.

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Mike Taylor, managing editor, Super Review: Well because we’ve spoken about regulators and increased powers, I guess we should try and move the debate along a little bit to governance, and here we have Andrew, and here we have Gerry, and I know that they are coming from slightly different parts of this argument, or different ends of this argument. 

So I’ll give Andrew first discussion on this. But there is a debate going on about governance of super funds, and I think multiple directorships amongst other things, or multiple trusteeships, and the FSC certainly has a position on that Andrew, so what is that position, and why? 

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Andrew Bragg, policy director, Financial Services Council: Well, the Cooper Review looked, as part of its review into the structure, efficiency and operation of the system, at the trustee governance model, and it made some recommendations.

They weren’t accepted, that’s the Government’s right to reject or accept recommendations made to it.

We, on behalf of our members, thought that this was an appropriate time, in moving to prudential standards, to actually build on what APRA was going to deliver in terms of broad new prudential standards – that we would develop a standard on board composition, let’s say, and also on conflict.

Our members will be moving from 1 July 2013 to a new standard on board composition, and that is the sort of model that we seek as the invested community to impose on companies in which we invest.

So, aligned with the ASIC’s corporate governance principle, FSC members who have an RSC will be compelled to have an independent chairperson and a majority of independent directors.

For some of our members that represents a large change, some are already there. We also sought to develop a standard on conflict to directorships, as we term them, which is that you can’t be a director of competing public offer superannuation funds.

So we see this as a build-on to the APRA standards. We think it’s important that we are consistent in how we engage the $1.4 trillion industry, so we are going to be, largely, ASIC’s corporate governance council – which we are – and seek to impose a particular type of best-practice governance model on companies.

We also think it’s only fit and appropriate that we apply it to ourselves. 

Mike Taylor, managing editor, Super Review: Gerry, I throw the floor to you. 

Gerard Noonan, chairman, Media Super: Well, you’re right Mike, this is an area of some controversy at the moment. And the question really turns on, to me, the use of the word “independent”, or the use of the word “independence”. 

At the risk of giving everyone a history lesson as to where the original structures came from, they emerged out of an industrial campaign, which oddly enough you and I were both reporting on when we were both cub reporters, which seems to be a pretty unlikely term I know, but that’s what we were doing.

The end part of the outcome to that was the creation of an equal representation trustee system to run not-for-profit funds.

But they were required to, through fiduciary obligations, to act with independence, as in the word “independence”. In my experience over that long period, that’s what’s occurred.

Now the situation for for-profit organisations is somewhat different, and I would say not analogous: that it would be seeking to replicate the structure of listed companies in Australia, and there’s not exactly the same structures that need to be put there.

Nevertheless, in the not-for-profit sector, or in the equal representation sector, there are a significant number of non-aligneds – in other words they do not come from either an employer or an employee nominating system.

They’re nominated by the board, which is what would occur in an ASX company; it’s to the order of about 60 directors out of about 600 directors across a not-for-profit sector.

So it’s in the order of 10 per cent of directors who are either non-aligned or independent, if you wanted to use that term, chairs, or directors of the organisations.

Now AIST has – as a representative body for the not-for-profit sector – we have at pretty much at the same time as Andrew’s organisation, been working through a framework for governance to ensure that greater transparency occurs, there’s a clear alliance of communications operating within our industry. 

But we still think that there is a role, an important role, for a high-performing, not-for-profit structure that has equal representation, which keeps the trustee structure close to the membership.

It doesn’t mean that it couldn’t have others there as well, but the basic model of equal representation we think has actually worked really well in creating a significant proportion of that $1.2 or $1.3 trillion in the first instance.

Mike Taylor, managing editor, Super Review: Alex Hutchison?

Alex Hutchison, chief executive, Energy Industries Super: I think at the end of the day, you’re there for members, you have to deliver on your fiduciary duties or be subject to change.

I’ve been on the retail side, more now on the industry fund side, so what I would say is that from what I have seen from an industry fund point of view, I think there is a role to play for equal representation.

I think that there should be a review of this area, but any change should be balanced and considered. And you shouldn’t throw the baby out with the bathwater, to be honest.

I mean, I think that as long as there is a balanced consideration of varying issues, the changes should be made in light of that.

And that goes for the other changes, which is the disclosure of remuneration of boards and execs, all of those types of issues.

I think, Mike, at the end of the day, there’s no debate over those issues. I think it’s just a matter of, I suppose, that alignment of the super legislation with listed companies on a lot of those matters, and I don’t think you can debate that.

But I think the equal representation model is a model that has been shown not to have failed, and there are some good parts to it.

So you should not ignore the history of the sector, blindly.

Mike Taylor, managing editor, Super Review: Russell Mason?

Russell Mason, partner, Deloitte: I think the FSC should be commended for what they’ve come out with. I think it’s a good model, and it will work in the commercial sector.

I also agree with Gerard and Alex that equal representation has worked in the main for industry funds, public sector corporate funds.

My main concern would be the conflicts of interest, and conflicts of interest can exist in any of those models. So I think that the regulators in particular, and the Government, should just be looking at trustee directors who are possibly conflicted, and coming up with rules and regulations that avoid those.

It may well be [done on] a case-by-case example.

But certainly you’ve got to be very careful if you sit on the board of more than one public offered fund; there are clear potential issues of conflict that arise, and I think that’s one area where trustee directors need to be very careful.

 But sitting on the boards of investment managers, on the boards of service providers, there’s a whole range of conflicts that can potentially arise, and I think they’re the ones, rather than equal representation versus independent, that really need to be looked at.

Gerard Noonan, chairman, Media Super: But Russell, you made reference to sitting on the boards of service providers, as well as being on the board of a fund.

I’m not one of those, but you’re right, there are a very small number of directors who are in that role.

But it seems to me that you’re seeking to find fault with that process, but not seeing that a similar kind of issue occurs elsewhere, and the way of resolving conflicts of interest is not necessarily that the people don’t have a conflict of interest, but the are able to resolve it.

 For instance, I know Andrew’s code, the code the FSC has developed, allows for, if I understand it correctly, a director of a bank, say, who is there as an independent, to also be a director of a trustee.

Now the argument seems to be that, well, if you’re already a non-executive director or you’re an independent at the higher banking level, then you’ll retain your independence as you reach down into the trustee structure. 

That seems to me to be pretty much the equivalent of what you’re identifying as a problem in the not-for-profit sector. So I think it’s kind of one of those, you know, what’s good for the goose is for the gander things as well.  

Russell Mason, partner, Deloitte: I agree, and it may be beneficial being director of a service provider. It’s how those conflicts are handled, and too often I’ve seen that people think a declaration of a conflict handles it.

I had a case a while ago where a director sat on the board of one of the investment managers, and he quite correctly said, “well we’re going to decide whether he gives this investment manager money, I’ll leave the room while you make the decision”.

I thought, well, that’s great, except for his parting words, “but I’d just like to say that if you don’t invest with this manager I think you’ve got rocks in your head, it’s the best team I’ve ever seen”.

A very influential trustee – and I thought, “well, you may as well sit down and vote the way you’ve exercised influence. So…

Gerard Noonan, chairman, Media Super: It’s pretty bad chairmanship though, isn’t it, that? 

Russell Mason, partner, Deloitte: Well it was hard to stop him. He moved quickly.

But as I say, it’s not that the conflict exists, it’s how it’s handled professionally, and I agree with you, you can’t be blanket, there could be very good reasons why you could sit on the board of your administrator, or your insurer or someone… and at the end of the day be beneficial for the fund. 

Andrew Bragg, policy director, Financial Services Council: Certainly some conflicts can be managed, [but] there are some that ought to be prohibited; and the focus of our standing is in situations where there’s a director of two boards, who is competing for the same market, and they’re a public offer super fund.

We don’t believe that’s appropriate – it would be the same as being a director of Qantas and Virgin.

Mike Taylor, managing editor, Super Review: One of the things that gave rise to a lot of the debate about governance was fund mergers, and there is consolidation going on within the industry.

I think a lot of people know this is for reasons other than anything to do with governance – it’s also a just a commercial imperative a lot of the time for the funds.

But one of the things that contributed to the controversy I guess, was that there was the suggestion that some of the trustees voting for mergers have an interest in one of the funds that was merging.

So my question to the panel, and I’ll start with Russell Mason on this one is … is it necessary to be moving to fewer larger funds, and are the commercial imperatives there, or is there room for medium-sized funds, and at what stage do you start to say, “well, that fund is not big enough to survive”? 

Russell Mason, partner, Deloitte: I think there’s definitely room for medium-sized funds, as there is room for the mega-funds. Not everybody drives a Ford or a Holden, there’s a variety of tastes of members, all look for different things in the funds.

They may look for a fund that’s very much geared towards their occupation – Media Super is a good example of that.

They may be looking for a fund that has an office close to where they live in regional Australia. So I don’t think you can be black and white about it.

There are some very small funds that must be struggling; the cost of compliance and risk management is becoming quite onerous for those funds.

The mid-sized funds, the $3 billion to $4 billion, $5 billion funds, I personally think if they target their market properly, as in any business or any commercial model, they have a future.

There are small shops, there are large shops, there are department stores: if they pick their market correctly, if they know their customer and know their client, then they’ll survive and they’ll flourish. And I think the same applies to superannuation funds.  

Mike Taylor, managing editor, Super Review: Alex Hutchison, you’re strangely enough running the fund that looked at all of this not so long ago, what’s your bit?

Alex Hutchison, chief executive, Energy Industries Super: I drove Halliwell to what’s happening with the industry, or more funds at the moment now, with what happened with credit unions. In 1996 there was 493 credit unions in Australia, today there’s about 96 credit unions – mutual banks is the other name they’re known by.

The main reasons most of those merged were commercial reasons – just you know, put it out there.  

However, a number of those, quite a number of what we would I suppose call medium-sized credit unions/mutual banks, very much understand their member base: for example Teachers Credit Union, or Teachers Mutual Bank as it’s known now; the Police; Nurses; some of those types of occupations. And they’re very successful institutions.

So at the end of the day it’ll be driven by those two things: the commercial realities of where you are, because that’s the reality of life; but in particular, if you’ve got a strong bond with your membership, and you have a point of difference, then there is, I think, a very very strong role for you to survive and thrive into the future.

And you know what, one size doesn’t fit all, there should be diversity in the industry, and anyone who thinks that everyone should just amalgamate into larger funds like the Death Star or something like that, I think that would be a negative thing for the industry.

The industry needs that diversity.

Gerard Noonan, chairman, Media Super: We’d like to think of it as a red door rather than … I only make two points in relation to the issue about mergers.

Firstly is that as Russell mentions, we’re headed perhaps for some mega-funds, but I don’t think we’ve quite got a sense of what scale there is out there. 

Occasionally I deal with CalPERS and CalSTRS and Ontario Teachers, they’re funds of $200 billion each, and there’s a lot of them actually, if you go to Europe, particularly Scandinavia and in the Netherlands as well.

You’ve got very big funds, funds certainly larger than $100 billion.

Now AustralianSuper is likely to be $100 billion in size in probably four or five years, so we’ll get our first taste of that level of funds, and funds that sit in Andrew’s world will be also of that order in that timeframe as well.

So we’ll start to get to the mega-fund size: well, larger funds. I do think, on that the issue about compliance and also risk management, when you’ve effectively got a “one-size-fits-all” from the regulator, the regulator is requiring exactly the same risk management and compliance from a fund. So that actually is going to be a problem for some smaller funds.

The second thing about mergers is, and I’m the victim or the triumphal victor of two of them, is they’re actually hard to do.

They’re complicated things to do, there’s lots of human sacrifice goes on in the process of pulling off mergers.

They look like they should be done to benefit members, that is the ultimate goal of these exercises, but they are complex things to do. If you think getting registration under MySuper is hard, you should try pulling off a merger.

Frank Crapis, head of industry fund group insurance, CommInsure: It seems to be a push from the regulator, to consolidate a lot of the funds, so if you look at some stats from APRA, there was 4,700 funds out there in the 1990s, and now it’s down to 300-odd just recently.

So there seems to be a push to have these mega funds, or larger funds in place. And there was also a report recently by Rice Warner Actuaries where they said that from a fee perspective, on assets, it’s been shown there’s evidence that there’s been a reduction in terms of the cost of fees on assets from $1.27 to $1.2. And it’s all based on the fees point of view.

But if you look at it from an insurance point of view, as these funds are becoming larger, and the mandates for the insurance are becoming larger, it’s becoming quite challenging for insurers to actually be able to provide insurance to those larger funds, and there’s a number of reasons for that.

One is, capital requirements are becoming much more expensive, and there’s much more capital that needs to be held by an insurer.

Also the funds themselves as they become larger are sort of moving away from a particular industry, and so therefore by doing that it’s hard to actually tailor a product to that particular need.

But also from an insurer’s point of view, there’s a number of things they need to factor in when they’re taking on these large funds.

One is not only the capital, but do they have the right resources to actually manage the claims that come through; the right technology to ensure that they can hold the data appropriately and report on it; the right experience within their own teams to manage these large demands.

 So a lot of the discussion to date has been around funds under management, and the benefits of that.

But from an insurance point of view, tailoring it is going to be the challenge going forward as these funds become larger.

And we’re quite unique in Australia because we do have the insurance attached to it, so making that comparison overseas can be sometimes not by an apple for apple comparison. 

Mike Taylor, managing editor, Super Review: Tim, as an administrator, what would you rather be administering, a mid-size or a mega fund, because they keep telling me there’s not a lot of money in administrating. 

Tim Buskens, head of industry initiatives, Australian Administration Services: There’s no money in administration, Mike.

So for us it doesn’t matter if it’s small, medium, or large. I suppose my comments to this: I do agree with Russell, I think there’s space for all flavours of funds.

Yes, for the smaller funds with the regulatory components of those, it does become harder; particularly if they try to do their administration in-house, I just can’t see that segment surviving.

But in terms of the medium-sized funds and the large funds, there’s room for that, and then there is as good value as they can provide to their members. I can’t see that model changing too much over time.  

Mike Taylor, managing editor, Super Review: Andrew, in the retail sector, there’s been some pretty interesting developments in terms of not so much getting larger, but certainly pulling down their overheads and costs.

Can you see that being a continuing trend in the retail space, particularly where I know the funds will be very competitive with the industry funds?

Andrew Bragg, policy director, Financial Services Council: Yeah, certainly from a fee perspective: I think from a macro perspective, how many funds there are, there’s 220 public offer funds today, in 10 years there’ll be 100, so that is trended to go down.

Where is that going to happen? Principally we expect that will happen probably in the industry fund sector, there’ll be consolidation there, especially if they can get the CGT rollover relief legislated, and come to an accommodation between different boards about how that all works.

From a retail perspective or for-profit funds … they’re quite big funds. In terms of whether there’s further scope for consolidation in the for-profit sector, I think the nature of the big guys being attached to the banks … certainly at the ACCC last time, there was discussion.

I think they made it a pretty clear view that that wasn’t going to happen. So unless you see demergers, I don’t think there’ll be a whole lot of consolidation at the big end.

And in terms of fees: clearly CBA, AMP, BT, ANZ, all the pretty cheap and cheerful super products in the market. 

I imagine that MySuper again will probably be quite a game changing event, and you’ll be able to see your Aussie Super MySuper, versus your AMP MySuper, on the same table. Apples with apples for the first time, everyone’s got one My Super per conglomerate basically.

I think from a fair perspective, no one’s going to want to be on that APRA table where, dare I say 150 bps, I think everyone will want to be, I assume, some 100 or thereabouts, I think the fees will need to go down.