SYDNEY - 2 August 2013: The superannuation system is based on trust: trust that the employer will make contributions accurately and on time, trust that the financial institutions responsible for administering the funds will do a good job, trust that the competitive juices will spur those same financial institutions to innovate and pursue cost efficiency.

It is also based on trust law.  For some this seems an obvious choice.  The trust paradigm exudes protective paternalism.  An avuncular authority figure, the trustee, is invested with the power to influence the property of others, the beneficiaries.  The trustee is required to be faithful, impartial, careful, (somewhat) skilful and diligent in its administration of the trust.  It cannot accept unauthorised remuneration nor be distracted by improper purposes or competing interests or duties.

But there is a paradox at the heart of the paternalism, for just as trust law trumpets its stringency in respect of trustees taking advantage of their position, so also a beneficiary’s right to hear, never mind challenge, the reasons for a trustee’s ‘discretionary’ decisions is emaciated at best.  The process can be questioned but not the substance of the trustee’s decision.

For a growing number of commentators, this paternalism is inconsistent with the modern movement towards transparency and accountability in public life.  Participation in the superannuation system is mandatory for most adult Australians and, as the High Court recently recognised for the first time, superannuation balances are, at least in a notional sense, their money.

It is this reality that the Superannuation Industry (Supervision) Act (“SIS Act”) tries to address.  In its original form, the SIS Act purported to hold the trustees of superannuation funds accountable for the same sorts of things the general law had always championed.  What it failed to recognise was that such aspirations were just that, aspirations, if they were not supported by mechanisms by which they could be enforced.  The recent Stronger Super reforms to the SIS Act are directed towards addressing this shortcoming.  They make clear that the individuals participating in the decisions that affect the administration of the trust cannot hide behind the corporate veil any longer, nor can they entrench related party arrangements in such a way as to circumvent the conflicts proscriptions. 

The reforms also provide for the disclosure of unprecedented levels of information about performance, fees, portfolio holdings and governance matters to regulators, to members and to the marketplace.  It is not always appreciated that this is a key component of the accountability strategy.  The costs of the information disclosure are considerable, and any benefits will be only partially observable.  Perhaps some transgressions or opportunities for efficiency gains will be identified through the disclosures, but the value of greater transparency has been, and always will be, the disinfecting effect of subjecting the activity to the full glare of sunlight.  Behaviours change and with them social norms.  It is not too hard to forecast, and there has been some evidence already, that practices that would once have been commonplace will receive greater scrutiny when those in control, the directors of the company acting as trustee of the fund, know they can be observed and held to account.

But held to account by whom?  The layering of information disclosure in the Stronger Super reforms is designed to inform three layers of accountability.  At one level there is a desire to ensure that members receive relevant information in a timely and digestible manner, and that they can get answers to any legitimate questions they may have about their fund.  There are also highly granular disclosures to assist APRA to play its role.  And there are certain disclosures that are designed to inform the market generally. 

The idea that trustees should be accountable to the market may strike some in the industry, especially those in the legal sorority, as odd.  But it does underscore the multi-valent nature of the regulatory regime now applied to the superannuation system.  Trustees will be directly accountable through the court to members for certain things, such as the quality of their stewardship, and will face the usual reputational and financial consequences if a transgression is proven.  Trustees will also be accountable to APRA for other things, with the threat of licensing and other administrative sanctions operating not so much on individuals as on the financial institutions themselves.  And what of the public disclosures?  They certainly operate prophylactically, but they also introduce other forms of market discipline, from prospective buyers, research firms and academics whose analysis and evaluation influence both policy and market demand.  This is not accountability in the sense of legal or administrative sanction, but it is important nonetheless.

Trust law has a great many virtues but it was never meant to sustain a system as broad and publicly-oriented as the superannuation system.  That the system has not experienced more scandals (and let’s be clear, the record is not spotless) is a testament to the probity and diligence of the individuals and institutions involved in the system over the past two decades.  But can we trust that to continue?  Probably.  But at the same time it is worth recalling that the temptations to transgress are 10 times greater today than in 1993, and the impact of inefficiencies are likewise 10 times greater.  Trust can only get you so far.