The recent global financial turmoil has led to a profound questioning of what constitutes good governance. Across the world, the directors of many corporate boards have been accused of not paying attention, not understanding what they were investing in, and not looking after other people’s money as if it were their own. But how do the superannuation funds themselves stack up on the governance front? The first phase of the government’s review into superannuation – chaired by Jeremy Cooper – is focusing on fund governance.
The role of trustee directors is being examined more closely than at any time in the 25 year history of modern superannuation. This examination is both timely and appropriate – not only because the global financial mess has highlighted the importance of effective governance – but because superannuation fund trustees in Australia are making decisions on what has now become the fourth largest pool of managed money in the world. The Cooper Review has promised it will ruffle some feathers in its examination of the superannuation industry. When it comes to governance, these “feathers” include board composition, conflict of interest and trustee education. The not-for-profit superannuation sector – which comprises the industry, public-sector and corporate funds where nearly two-thirds of Australian workers have their superannuation invested – is arguing vigorously that its unique model of governance – the trustee representative system – is the model that best serves member interests and, importantly, returns all profits to members.
Under this model, half the trustees must be elected or nominated by the fund members or relevant union and half must be appointed by the sponsoring employer, the aim being to ensure that the voices of workers – as well as employer representatives – are equally heard. A number of not-for-profit funds also have independent trustee directors to complement the board composition. By contrast, retail superannuation funds operate on a commercial basis to generate both a profit for their members AND the shareholders of their parent company. It is the parent company that typically appoints its own staff or directors as directors and executives of the fund and also pays their salary and/ or fees. The potential for conflict of interest is obvious and large, particularly – as is often the case – if the parent company is in the business of providing investment services to the superannuation sector.
Free from the shackles of this inherently-flawed governance structure, not-for-profit trustees (and their fund’s executive) are able to select whom they believe to be the best fund managers, custodians, asset consultants and other service providers, while also driving a hard bargain on fees to the obvious benefit of members. That is not to say that that the trustee representative model can’t be improved. AIST’s submission to the Cooper Review recognises the need for greater board diversity, disclosure requirements of trustee and executive remuneration (in salary bands) and a regulatory framework to identity and then remove under-performing funds. We call for a greater focus on succession planning to improve both age and gender diversity across boards and we recommend that trustee directors be required to renominate after every three years. While educational standards among trustee directors are generally high (83 per cent of trustees have tertiary, graduate or post graduate qualifications), we believe that ongoing training and professional development is crucial.
We recommend mandatory training for all new trustees as part of their induction and, following this, that 30 hours of continual professional development be considered as best practice. While there is no escaping the fact that Australia’s superannuation industry has produced disappointing returns in the past two financial years, some negatives are better than others. It’s welldocumented that not-for-profit funds outperform retail funds, with recent research suggesting that the trustee representative governance model may be a key factor behind this out-performance, which in the past decade or so has amounted to a very significant 2.4 per cent per annum. Given this superior track record, AIST believes all default funds – where more than 80 per cent of Australians currently have their superannuation invested – should be managed under the low-cost not-for-profit governance model. In a system where contributing to a superannuation fund is compulsory and the level of member disengagement is high, it’s vital that default funds or options are well-designed and costeffective. As we look ahead to a far less forgiving investment environment, members of not-of-profit funds can be confident that representative trustee boards put member interests first. There is no reason, and no motive, for them to act otherwise.