The governance of the superannuation funds remains an unresolved issue in Australia. The best efforts of the Australian Government, Cooper Review, APRA, and the Financial Services Council have left open governance arrangements that are at best questionable and at worst risible.

Superannuation funds play a large part in lives of Australian workers and pensioners. With projected increases in universal superannuation from 9 to 12% the central importance of superannuation for a secure retirement will become even greater. The funds already accumulated in Australian super amount to $1.4 trillion, and these funds will multiply considerably in years to come. The relative performance of the super funds is keenly observed, and APRA offers a quarterly report on this. The Australian government in 2009 established the Cooper Review into the governance, efficiency, structure and operation of Australia's superannuation system

The government’s intentions are to strengthen the governance, integrity and regulatory settings of the superannuation system, including in relation to self-managed superannuation funds.

In the amendments to the Superannuation Act (SIS Act) presented to Parliament on 15 August there was the proposal to create a distinct new office of 'trustee director' with all statutory duties (including those which would otherwise be in the Corporations Act) to be fully set out in the SIS Act, along with re focused duties for trustees.

These duties of trustee directors include:

• To act solely for the benefit of members, including and in particular:
• To avoid putting themselves in a position where their interests conflict with members' interests;
• To give priority to the duty to members when that duty conflicts with the trustee director's duty to the trustee company, its shareholders or any other person;
• To avoid putting themselves in a position where their duty to any other person (such as another super fund or a service provider) conflicts with their duty to members;
• To avoid putting themselves in a position where their duty to any other person (other than members) conflicts with their duty to the trustee company;

The Minister for Financial Services and Superannuation Bill Shorten welcomed the passage of legislation through the Parliament insisting this raises the standard for those managing Australians' superannuation savings, as well as closing a regulatory gap by giving APRA the same powers over superannuation funds that it has over banks and insurance companies.

The Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012 implements a number of changes recommended by the Cooper review.

Superannuation Governance Policy

The beneficiaries of superannuation funds have a right to expect that their funds will be managed to the highest standards of transparency, accountability, and competence. The efficiency, performance and integrity of the growing Australian superannuation industry will rest upon the development of effective prudential regulation and robust governance.

A great deal of attention has been focused by the media on the question of the independence of the trustees of superannuation funds, and specifically on the equal representation that presently exists on industry super boards from employer and union members. However the media has tended to avoid the glaring governance flaw of the retail super funds, where boards in the past were dominated by the executives of the parent company banks and insurance companies, when the ultimate duty of super fund trustees should be to the beneficiaries  of the fund, not the shareholders of the corporation controlling the super fund. With the new governance standards being developed for the super industry there is a chance to rectify this anomaly, but it seems likely that little will be done to improve the situation.

The introduction to the new APRA draft Guidance (2012) SPS 510 states:

“This Prudential Standard sets out minimum foundations for good governance of an RSE licensee’s business operations. It aims to ensure that an RSE licensee’s business operations are managed soundly and prudently by a competent Board, which can make reasonable and impartial business judgements in the best interests of beneficiaries.”

Yet the APRA draft Guidance does not set out clearly the requirements for directoral independence which are now universal in corporate governance codes including in the ASX Principles (2010). APRA refers to the importance of “independent thinking”  in section 18 on Board Renewal,  and makes reference to  “The policy must give consideration to whether directors have served on the Board for a period that could, or could reasonably be perceived to, materially interfere with their ability to act in the best interests of beneficiaries.”

However APRA does not define a basis by which the independence of directors might be judged, as it does later with regard to the independence of Auditors in section 58. Nor does APRA make reference to the possibility of a conflict of interest of directors as it does with reference to Auditors.

FSC Superannuation Governance Policy

The Financial Services Council (FSC) draft Standard of Superannuation Governance Policy compounds these weaknesses in the APRA draft guidance by allowing a bank or an insurer to appoint Directors to the board of RSE licensees who may be members of the Board of the listed bank or insurer. In clause 8.2.4. a) of the Standard the FSC qualifies the definition of an independent director of a super fund by accepting that this could be an independent director of the corporate entity controlling the super fund.

In a press release (12/9/2012) John Brogden the CEO of the FSC has insisted that  “Our superannuation governance policy adopts ASX Corporate Governance Council, Corporations Act and APRA definitions of independence. It uses the highest standard available in defining independence of a director from a super entity. There is no higher alternative.” These claims can be challenged.

The Industry Super Network position is that:

• The FSC Standard fails to establish a tenable policy framework for the definition of independent directors on the boards of super funds

• That replacing executives from the bank or insurer, with non-executive directors from the bank or insurer does not satisfy acceptable criteria of independence, since non-executive directors from the board of the bank or insurer are related parties who will encounter significant conflicts of interest, and conflicts in duty (in conflicting requirements to act in the best interests of shareholders under corporation law, and in the best interests of beneficiaries under trustee law).

• That it is not appropriate for directors of the parent company/and or related parties to be members of the board of the retail superannuation fund when the parent company/related party is the primary provider to the superannuation fund of all primary services (including administration, funds management, insurance, and financial planning).  APRA has questioned whether these commercial arrangements are consistent with the fiduciary obligations of trustees of a superannuation fund.

There is substance to these concerns, and it is clear that the Industry Super Network is right to question the viability of the FSC Superannuation Governance Policy on the grounds of

• a lack of definition of what constitutes an independent director of a superannuation fund

• the conflicts of interest and conflicts of duty that would inevitably and consistently occur if directors of superannuation funds are also non-executive directors of parent banks and insurance companies

• the inevitable and continous related party transactions that would be prevalent in the provision of all primary services to the superannuation fund if the directors of the fund were also directors of the parent bank or insurance companies.

The FSC proposals in the draft Standard on Superannuation Governance Policy do not meet the standards of governance, transparency or accountability that the beneficiaries of superannuation funds demand. The independence of directors under the proposals is not assured. The inevitable conflicts of interest and duties could damage the integrity and reputation of the industry.

You get the feeling this issue of super fund governance is simmering away, awaiting an almighty explosion. Normally in financial markets this occurs after some fatal collapse. Hopefully this  will not in this case given the security of so many people's futures is concerned. But what is more likely (as in the past) is a consistent relative neglect of beneficiaries interests in favour of corporate interests.