Super fund governance is getting more publicity than ever lately, after APRA undertook a study into the persistent outperformance of the not-for-profit superannuation funds relative to the commercial retail funds. While the prudential regulator concluded governance was not the reason for the overall performance differences (and is embarking on other studies to determine what is behind it), super funds should nevertheless be prepared for a spotlight on their governance structures that is only going to intensify. As the $1 trillion superannuation industry continues to prosper, it will need to start demonstrating to the public, not just the regulators, how it is walking its talk on corporate governance.

Queensland University of Technology academic Natalie Gallery has long questioned some of the privileges afforded to super funds around transparency and accountability, particularly in regards to financial reporting. Gallery has written a number of papers demanding more disclosure requirements be brought to bear on super funds.

Transparency and accountability are the mantra of governance buffs, yet a super fund’s disclosure obligations to the public are far less strenuous than what is demanded of a public company. Defenders of the current disclosure requirements will argue super funds should not be likened to a public company because they are different entities serving different purposes.

Gallery agrees that while this is true, the gap in differences is closing. She argues that superannuation’s shift from a defined benefit footing with employer liability, to today’s defined contribution or accumulation landscape where the individual member wears the risk, coupled with the era of competition introduced by choice of fund, has raised similarities between public companies and super funds that didn’t exist when the Superannuation Industry (Supervision) Act was legislated in 1993. “The superannuation industry has transformed since then,” Gallery says, “but the legislation hasn’t.”

Gallery says super fund financial reporting is a key area that needs to be brought up to par. “The current information available to members is insufficient to provide for fully informed decision-making in a choice-of-fund environment.” But further to this, she argues that accountability needs to be measured in some fashion, and a means of doing this is in providing easily accessible and substantial financial information to the public. “These organisations are getting public benefits with a concessional tax of 15 per cent. They’re underwritten with public money, entrusted with the public’s money.

It’s the trustees’ duty to discharge of their responsibility by accounting for how they have used that money,” she says. “It’s in everyone’s interest for super funds to be more publicly scrutinised.” Gallery presented the argument in the National Accountant magazine earlier this year with fellow QUT academic Gerry Gallery, that accounting requirements for super funds are “piecemeal” and “not sustainable”. Consolidated reporting needs to be introduced. The practice of separating the corporate trustee financial accounts from the super fund accounting of investment performance is widespread. The article says annual reports provided to super fund members have no prescribed format, unlike concise company reports, and so introduces a platform for “biased reporting”.

Without the guidelines public companies have, super funds abridge their annual reports with information that is “highly aggregated…usually presented as visually appealing graphics in the form of pie charts but which cannot be related back to the audited information in the financial report. “Similarly, investment returns are presented only as percentages, thus lacking transparency on how the numbers were derived. Also the expenses incurred by the fund as a whole cannot be traced back to the amounts of fees charged to members.” The super industry defends the status quo, saying funds will give their audited financial accounts to members upon request.

However as Gallery discovered, it’s not as easy as that sounds. SIS legislation has a provision whereby not only members, but “employers…and other concerned persons” can request the reports. These other parties “might include analysts, academics or journalists”, the legislation states. In 2000, Gallery wrote to all trustees of the defined benefit superannuation funds sponsored by Australia’s top 500 companies, requesting the funds’ audited financial reports.

As she related in the academic journal Abacus in 2003, only 25 funds – or 10 per cent – responded with the report. Some funds refused to give the reports with various reasons. Some said it was not a public document, it was private information, it was confidential, it was not fund policy to circulate this information, it was not available to non-members, and so on. Gallery followed up with a letter referring to the SIS requirements. A further 40 per cent of funds sent the audited financial report. But some continued to question her purpose, and one fund suggested she had misinterpreted the legislation, another said the requirement was “morally wrong” and refused to comply.

Gallery does not believe super funds are attempting to “keep secrets”. But she says the reluctance to provide these reports does demonstrate – apart from trustee ignorance of the legislation regarding disclosure – that, far from promoting transparency, “there is a culture of concealment, particularly among corporate defined benefit superannuation plans”. She suggests this culture is still evident today by the lack of audited financial reports being accessible through super fund websites.

And what does Gallery say to those who point to the lack of systemic failure or fraud within super compared to public companies as a reason to maintain the status quo? After all, if it ain’t broke, why fix it?

For Gallery, this is a straw man argument. “Fraud is not the big issue – and it has happened, they can’t say it hasn’t happened, it just hasn’t been publicised. But really, funds are more likely to be losing money through inefficiency than fraud,” Gallery says. With the corporate reporting framework – continuous disclosure, interim reporting, segment reporting – inefficiencies become clear quickly, and shareholders have a chance of legitimately determining whether their company should be subject to a takeover, Gallery says.

However in the case of super funds “you just don’t know”. Furthermore, once-a-year reporting only exacerbated members’ ignorance, Gallery added. The chair of the Australian Accounting Standards Board, Professor David Boymal, agrees accounting standards for super funds are not up to scratch. He points out it is not up to the AASB to enforce better governance, but he recognises the overlap: “Where does governance start and accounting stop?” he says.

Boymal says it’s a fair question to ask if super funds can be compared to a listed public company in terms of what their financial disclosure obligations should be. “The point is now that the funds have got so large, and with the idea of some of these master funds amalgamating, there probably is an argument for some of these enormous funds to be compared with public companies,” he says. In his personal view, he dismisses the argument that more disclosure will be useless to members. “We do need to discuss what is meaningful disclosure for super funds. It’s true that not enough people read the audited annual report, and a typical super fund member wouldn’t understand it in any event – they’re more interested in what they’ve sunk into it and that’s about it. “But what we’re talking about here is what the total looks like, about trustees fulfilling their trustee obligations. The individual member may not be interested but that doesn’t mean the trustee doesn’t have a responsibility to account for how they’ve run the show.”

Boymal recognises that super funds are audited and regulated – although he remarks as an aside that their accounts are not as good or as detailed as those of listed companies – but he is concerned that this information is not more publicly available. “Yes, they are [audited]. But they don’t put that information on the public record. In other words, they don’t see themselves as publicly accountable. This is a real issue. Any organisation taking money from the public has to be accountable to that public,” he says. Accounting standards and disclosure needs to be such that not only is the member informed of their own position but they can fairly compare that across other funds, Boymal says, but the current standards and loose definitions render this difficult.

This is a point Gallery has also made. The AASB has been reviewing the accounting standard AAS 25 Financial Reporting by Superannuation Plans for some time now, and an exposure draft is expected in July this year, according to Boymal. Shareholder activist Stephen Mayne suggests that more frequent disclosure may actually lead to more member engagement anyway, removing the ‘members-aren’t-interested-so-why-disclose?’ argument. “I get the sense that the level of engagement with fund members is pretty poor. And they’re a thoroughly disengaged group of constituents – they don’t understand, they’re not interested, they’re not being engaged, and everyone seems to be doing the bare minimum.

That whole culture doesn’t promote good governance – supported by accountability, transparency and disclosure,” Mayne says. Nor does Mayne think more frequent disclosure of financial positions would promote short-termism in members, just as company disclosure does not prevent people investing for the long term. “It’s not that much different from the daily publication of a share price, is it? I mean, they would have a regular assessment of the value of the portfolio – it’s worked out by management and presented to the board. They’re always getting updates. I can’t see why more of that information can’t be released on the website of the super fund so that members who are interested can access it,” he says. “I think people are mature enough to say we are inventing for the long term and this is the snap shot of where we’re currently at.”

Mayne is scathing of the inaccessibility of financial reports, but he’s even more critical of the non-disclosure of executive pay in audited reports. The matter of disclosing pay is a small but stark difference between what super funds and listed companies are required to include on their audited reports. “It’s completely hypocritical that super funds are voting on the disclosed pay figures for the companies they invest in whilst not disclosing their own executive pay,” he says. “It’s good practice – we can see if people are getting ripped off. I mean why should a super fund be able to secretly give $5 million bucks to their chief executive and not disclose it? Politicians pay is disclosed, directors fees are disclosed: its ridiculous in this era of remuneration disclosure that we’ve got a trillion dollars of super fund money out there being managed by people on secret salaries.”

Mayne suggests that super funds managing above a determined amount should have to disclose executive and director pay as good disclosure practice. ACSI chief executive Ann Byrne doubts disclosure of super fund executive pay would serve any real purpose in super funds. Nor does the former UniSuper CEO agree that more should be demanded of super fund transparency in light of what is demanded of publicly owned companies. “We do think transparency and increasing disclosure is a good thing, but super funds and public companies are different sort of beasts,” Byrne says. “Super funds do disclose this information when requested by their members, which is the important thing.” Byrne gives her reasons for holding companies to a different accountability standard. “Public companies are required to constantly disclose their financial status because everyone in the public has the option to buy shares of that company at any time,” she says.

“The disclosure of executive pay is different for companies because when people invest in a company, one way they can make sure the board is investing in its staff is to know how they are rewarding their performance – they want to make sure that reward structure is in alignment with the shareholders’ [return].” She says members of super funds should not be compared with shareholders in terms of the level of knowledge they require. It is sufficient for a member to know that the super fund is doing its work properly by checking whether the fund is consistently meeting the expectations it sets out in its various investment options, and is sticking to the management costs it asks of members.

Chief executive of $30 billion industry fund AustralianSuper, Ian Silk, also says current super fund financial disclosure is sufficient because members know exactly how much they’re paying, and that’s what matters. “With all industry funds you know how much you’re paying: you’re paying a clear administration cost and an identifiable basis point amount for investment costs, depending on what investment option you’re in,” he says. “This is important in a choice of fund environment because costs are a critical factor in making judgements between superannuation providers.” The accuracy of reported fees was disputed in a study released last month by superannuation consultancy Chant West Financial Services.

Covered in-depth elsewhere this issue, the study found that across 35 major super funds of all four fund types, there was much inconsistency in disclosure of investment performance fees. Furthermore, “there is almost universal non-disclosure of underlying manager fees (base fees and performance fees) in fund-of-fund type investments (private equity, infrastructure and hedge funds).” “This can materially understate the true cost of these investments and the true cost of a fund as well,” the report says.

The prudential regulator has undertaken its own review of governance structures of all superannuation funds, compiling the most comprehensive data to date on the make-up of super fund boards. It found that explicit disclosure to members of service providers’ fees was not commonplace. Retail funds are among the most likely to explicitly state fees, with around 75 per cent of funds disclosing them, while corporate funds were the least likely to disclose this, with around 70 per cent of corporate funds often not disclosing.

APRA says its study had sought to ascertain whether governance could be a reason for the “systematic difference” in super fund returns between the four super fund sectors: corporate, public sector, retail and industry. Among other structural problems, APRA’s study revealed a high percentage of trustees with “one or more associations” with a fund service provider. Retail funds had the highest prevalence of trustees – 60 per cent – with such an association. This was double that of corporate fund boards, and almost triple the level of service provider associates to be found on public sector and industry fund boards. SuperRatings managing director, Jeff Bresnahan, says conflict of interest is one of the persistent problems of super fund governance. In the six years SuperRatings has been operating,

Bresnahan says governance has improved quite a lot in this regard, but very serious conflicts of interest continue unabated. He prefers to keep his specific examples of such occurrences to himself, suffice to say that of the six criteria SuperRatings addresses to establish a rating on a super fund, governance is the most contentious. “Out of all the areas we rate, governance would be the most confrontational,” Bresnahan says. “It is constantly the area where we have the most animated discussions.”

Another relationship that may be a conflict of interest is when a director sits on the board of more than one superannuation fund. Bresnehan agrees it’s a concern, but would not downgrade a fund for having a director who sits on another fund’s board. “We’re not rating the individuals,” he says. “The fact an individual may have a perceived conflict of interest is not a huge impact on our rating because that individual could go at any time.” “But it’s a question that needs to be considered. I wouldn’t walk away from it.”

When superannuation minister Senator Nick Sherry was asked at the Conference of Major Superannuation Funds in March this year if multiple directorships were going to be looked at in his self-described ‘focus on governance’, he replied he had never been asked the question before. He has since received at least one letter from a trustee urging him to address this issue, and has yet to respond. Under the choice-of-fund regime, any public offer fund is technically a competitor with any other public offer fund, and the new competitive landscape is starting to leave its mark. When the Australian Institute of Superannuation Trustees held its inaugural conference on super fund governance in May, multiple directorships – while not on the official agenda – got a fair hearing. Peter Hay, director of auditing at KPMG, spoke on conflicts of interest.

He argued that having a trustee on your board who was already trustee of another public offer fund may not be best practice. However, rather than “jumping on it”, he said it would be better not to let the situation reoccur with future appointments of directors. Hesta chief executive Anne-Marie Corboy believed it was not so “black and white” as two public offer super funds automatically being competitors. For example, she did not regard Hesta as a competitor to Cbus, even though they are both public offer funds, because of the different industries they target. But she said Hesta would bar anyone from Health Super’s board from sitting on Hesta’s board, because they are both operating in the health sector.

Angela Emslie, a trustee on four super fund boards – Hesta, VicSuper, Care Super, and Vision Super – was asked at the conference how she viewed her situation. She told conference delegates it was really up to individual boards to look at what was important to them. “One size doesn’t fit all,” she said. If a fund so desired, Emslie added, it could exclude a director simply because he or she sat on the board of another fund – such as Hesta’s exclusion of Health Super. In Emslie’s case, she explained that an employer-sponsor common to all four funds – the Victorian Employers’ Chamber of Commerce and Industry – had wanted to consolidate its board positions, and so had eventually placed the one person on all four boards.

Emslie pointed out there were benefits, such as the multiplying effect of the trustee education she received. “I would ask everyone just how much of a problem is it? And where is the evidence to suggest that it is a problem?” Emslie said at the AIST conference. But would members nominate or vote for a director if they knew that director was already on another fund’s board? Given that super funds by and large do not allow members to vote on directorships, it’s a purely hypothetical question.

Byrne says voting for directors is not necessary for super funds, unlike public companies, because the boards exist for different purposes. Some super funds have elections, or a form of member input – such as UniSuper with its electoral college – but the necessity of such input is not the same for all funds. Besides, Byrne points out, a democratic vote from each member would be very costly. “Each super fund establishes itself with its various constituencies represented on the board. While some funds may not ask every member what their vote is, there are nevertheless established mechanisms to ensure they are represented,” Byrne says. “You also have to consider if your process is not only effective, but also efficient. [Voting] is an incredibly expensive process.”

Silk agrees that voting for directors would not be worth the cost and asks for evidence that the outcome would be better if elections were more practised. “It is a costly exercise, and for what benefit? This is what you’ve got to come back to. People may say: there are no elections for directors. There are no elections, therefore what? Is it poor governance? Poor performance? Poor service for members?

None of those outcomes exist in the industry fund sector. There is, overwhelmingly, very good outcomes for industry fund members under the current arrangements,” he says. Silk also points out that super fund directors are required to meet certain criteria – the ‘fit and proper’ provisions of the SIS Act – whereas public company directors do not have to jump any such hurdles.

Silk admits it’s easy to say elections don’t matter when you don’t have them, but rejects that they should be introduced to super funds just because people feel more comfortable with that process. “On this whole issue [of transparency and accountability], we have given it a lot of thought,” he says. “We have sought to introduce as many mechanisms as we can to make greater transparency and accountability a reality.” AustralianSuper has established a quasi annual general meeting each year where all members are invited to attend, along with those who might be interested in joining the fund. All directors attend the forum, which is “run in very similar format to an AGM”, Silk says. It is held in two different states in Australia each year, and is live webcast.

Questions can be sent through webcast or taken from the floor. “This is the ultimate form of accountability: members are able to eyeball their directors, ask them questions, and also discuss concerns with them over a cup of coffee before and after the forum,” Silk says. “We’ve got a lot of terrific feedback through the forum and acted on it.” As for the merger of STA and ARF to form AustralianSuper in June 2006, Silk says members were informed prior to the fact and were asked for feedback.

Again, a vote on the merger from members was not conducted because, apart from not being a regulatory requirement, it would have been too expensive, Silk says. He adds that the board of an industry super fund may have different motives from that of a retail fund, which like public company boards has shareholders on its horizon. “The board is set up to act in the interests of members,” he says.

“The whole board of both [funds behind the AustralianSuper merger] acted in what they saw as the best interest of the members because they had no other reason to act,” he says. “On a commercial [super fund] board, directors may have – they shouldn’t have, but they may have – other interests in mind. [Industry fund] boards have a single focus in mind.”

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