By Tom Garcia, AIST

SYDNEY: 17 November 2014 – Superannuation governance is once again in the media spotlight. Against the background of the royal commission into unions and corruption, questions have been raised about the merits of the representative trustee system – the system of appointing equal numbers of directors to not-for-profit superannuation funds from employer and employee organisations.

Recent media coverage has focused on revelations of a privacy breach, which is a serious matter.  Indeed, this has been recognised by the fund concerned, which has asked former ACCC chairman Graeme Samuel to examine its governance.

But to claim – as some have – that this particular incident is indicative of a widespread failure of the representative trustee system is ridiculous. As Dr Scott Donald, Deputy Director of the Centre for Law Markets and Regulation at UNSW Law and a leading researcher into superannuation governance has noted on a number of occasions, there is a strikingly low incidence of regulatory infringement by superannuation trustees compared to company directors or public officials.

AIST has long argued that one of the key benefits of ‘representative’ directors is that they are independent from the fund’s management and are therefore free to act solely in members’ best interests.

Diversity is also a benefit.  Where else but in an industry super fund boardroom would you find a senior engineering manager, a director of a top 50 ASX company, a union official and a lawyer sitting around a table engaged in a healthy and vigorous debate about the pros and cons of investing in a multi-million dollar infrastructure project with a collective goal in mind?

The diversity of the background and experience of not-for-profit boards comes about because of the way trustee directors are appointed by the fund’s employer and employee sponsoring organisations. Under the equal representation model, these sponsoring organisations either nominate or elect an equal number of directors to the board. In addition, some funds appoint non-representative (so-called independent) directors. The board of the $4 billion LUCRF super fund, for example, has five member representative directors, five employer representatives and two independent directors. Importantly, no one group of directors can dominate key decisions made as, by law, any decisions put to the vote must win a two thirds majority to be acted upon.

The representative trustee system reflects both the occupational heritage of Australia’s compulsory super system and the view that member and employer representation in a mutual ownership structure is critical to delivering the best retirement outcomes for Australian workers. This view is underscored by the consistent and undisputed long-term out-performance of funds with representative trustee directors on their boards. .

Commenting about the responsibility and behaviour of corporate boardrooms in the aftermath of the global financial crisis, the European Commission noted that many corporate boards lacked diversity of thought, resulting in too few directors being prepared to speak up and challenge the so-called experts.   But independence is not just about structural independence - that is the absence of a connection with any other stakeholder; it is actually all about true independence, a preparedness to think differently and a determination to put the needs of members first.

There are plenty of examples in corporate Australia where directors are cut from the same cloth. The same names pop up over and over again, as boards and recruiters play it safe by appointing known performers with similar professional backgrounds. Lack of diversity is also a problem when appointing independent directors. A recent survey of top FTSE 100 companies in the UK showed that 16 independent directors held 54 non-executive directorships between them.  

By contrast, the large pool of more than 600 NFP trustee directors is wide and deep. According to AIST data on our 64 member funds, nearly 100 employee, union and employer groups are involved in nominating or electing directors to super fund boards. In addition to the many different unions that nominate directors, employer-nominated directors come from a variety of sponsoring bodies such as the Australia Industry Group, the Master Builders’ Association and State Chambers of commerce, as well as State and Federal Governments in the case of public sector funds. Many of these directors either work (or have previously worked) in ‘day’ jobs where they advocate on behalf of members. The term ‘member representation’ is not only part of their vernacular, it’s in their DNA. As many a brow-beaten fund manager, administrator or asset consultant will attest, these people know how to negotiate and drive a hard bargain – all in the best interests of super fund members. Independent research by the Australian Prudential Regulation Authority (APRA) supports this claim, with members of NFP funds paying significantly less for administration, for example,  than members of bank-owned super funds.  

Among those funds with a high representation of blue collar workers, representative directors have fought hard to secure affordable insurance for members in high-risk jobs. Similarly, in industries where sham contracting is rife, representative directors have supported funds’ investigating employers to ensure they meet their superannuation obligations.

The benefits of the involvement of representative directors in superannuation even extend to members of bank and insurance-owned superannuation funds and their advisor clients. Many of the superannuation reforms we take for granted – including key consumer protection measures and the compulsory superannuation system itself – were created out of vigorous debate within the union movement and the broader NFP sector. In appointing any director to a board, super funds must satisfy fit and proper guidelines that are strictly enforced by the regulator. AIST’s data shows that the formal educational qualifications of representative directors – enhanced by a legal requirement to maintain competency by completing ongoing professional development – are consistent with the corporate sector boards of entities of comparable size and complexity

Far from being a quirky, out-dated governance system peculiar to Australian super funds, the representative trustee system is common to many overseas pension funds. The latest available data from the OECD shows at least a half appoint directors using the representative trustee system.

There can be no argument that the boardrooms of super funds must operate to the highest standards. In a compulsory super system such as ours, the Australian public should expect nothing less.

But without any robust evidence of a systemic governance problem in not-for-profit superannuation, the push to water down the representative trustee system would appear to be driven either by ideology or commercial self-interest, rather than any genuine concern about members’ retirement savings.

The Australian Institute of Superannuation Trustees (AIST) is the peak representative body of the $600 billion not-for-profit superannuation sector which includes industry funds, public-sector and corporate funds.

This opinion piece first appeared in the Sydney Morning Herald