Will super funds be better off with more independent trustees? The government thinks so. David Rowley asked the industry their thoughts.
Sub-optimal superannuation funds pose a threat to national finances. This is a key starting point for those that urge change to fund boards.
The belief runs that with national debt spiralling, the government cannot afford for any superannuation funds to under-acheive and thereby cause a greater reliance on the age pension.
It cannot allow tax breaks for contributions to be squandered on sub-par investment strategies.
The argument says that whereas in 1993 a consensus was needed to kick-start superannuation, now with assets in the system equal to gross domestic product, a different governance model is needed to ensure that are no threats to the system.
Pauline Vamos, chief executive of the Association of Superannuation Funds of Australia, believes the current employer/ employee representative model adopted by around 76 industry funds is not fit for the future.
“You cannot start from the point that it has been OK to date,” says Vamos. “The government is heavily relying on us to deliver, they do not want to hedge their bets.”
She believes there is a good chance that the government will go beyond the one third, one third, one third model and insist on a majority of independents. For Jack Gray, the adjunct at UTS Business and the former chief investment officer of Sunsuper, such a move is a chance for boards to be able to appoint the best possible people.
“If being in a trustee role demands substantial time commitments, high levels of knowledge and skill, and appropriate temperaments, it becomes insultingly absurd to select them from the tiny pool of those who belong to certain unions or employer groups,” he says.
Gray also believes current boards suffer from self-interest.
“If a trustee is appointed by a union/employer group, at least some of his/her loyalty will be to the appointing body and not to the fund members,” he says.
He attributes the failure of fund mergers to this self-interest and adds that boards need reforming to more easily enable the removal of failing or corrupt trustees.
Warren Chant, director of Chant West, believes independents will benefit decision-making.
For him the employer/employee representative model can often lead to a deadlock over decisions that independents, if they made a third of the board, could break.
“What we see in most cases is that the union reps are far more passionate about super than the employer representatives. Unions see super as part of someone’s wage, so it is dear to their heart. With the employers it is not such an important thing; they are not in there fighting about super, they are fighting about terms and conditions of hiring people.”
He sees independents by their very nature being more likely to question whether a fund has economies of scale and whether it could benefit from a merger.
The argument against enforcing independents
Poor investment returns for industry funds would give the government a clear mandate for change, but awkwardly for them, the reverse has happened. Duly, the primary case against change is to ask ‘why mess with a successful formula’?
Secondly, most of those spoken to for this article, including those for change, can draw on experience of having encountered independent directors that ranged from useless to brilliant. The only conclusion one can make is that independents are no guarantee of success. Additionally, even if the new independents are highly skilled, this does not guarantee a high-performing board – as several academic and professional studies have shown.
Tom Garcia, chief executive of AIST, says a board’s culture and values are equally important and that the values of not-for-profit industry funds are all part of their success. He paints a scenario of a brilliant person with no social skills being introduced to help a successful business. Along this line of thought he points to analysis which shows ASX companies that have adopted independents underperform.
Fiona Trafford-Walker, director of consulting at Frontier Advisers, praises the efficacy of industry fund boards and is concerned that the imposition of new trustees will lead to a loss of skill sets. In her experience, the diligence to read board papers, to persist with questions and not be afraid to ask, if they did not understand something, were the best qualities of trustees and these often went hand in hand with a strong sense of ownership – an ownership some would say only union and employer representatives have.
Ian Robertson, secretary of DEPA and former director of Local Government Super, finds it hard to imagine many skilled professionals being financially motivated to act as a trustee – LGS directors are paid around $44,000. To read 400-700 pages for a monthly meeting requires a strong sense of altruism, he says.
“Being a trustee on a superannuation fund is onerous, demanding both emotionally and intellectually and a rapacious devourer of time. It’s not simply a sinecure,” he says.
Indeed, there is a sense that the government has not fully thought through the implications of enforcing its vision for more independents and that, if anything, it might have to adopt a pragmatic approach to change, where some funds are reformed and others left alone.
Garcia agrees: “It stuns me that a Liberal government that is all about competition is now saying we all want you to look the same.”
A further glaring omission in the government’s argument for change is the exclusion of self-managed super funds (SMSFs) from higher governance standards.
Nick Sherry, the former superannuation minister and current adviser to Citi and EY, says: “What bemuses me about this entire debate is it is not the main game. What skill sets do trustees of SMSF schemes have? The government provides substantial tax concessions for them, but people can become trustees with no training whatsoever. They are not supervised or regulated; they simply need a notification to the tax office.”
If the government decides to over-ride common sense, it faces the accusation of political manoeuvring. It will always find it difficult to shake the belief that its main goal is to weaken the power and the influence of unions.
One might hope that if the government does listen to both sides of the argument, it will let high-performing funds be and not impose independent directors onto them. Instead, perhaps it will empower the Australian Prudential Regulatory Authority (APRA) to act where it sees inefficiency or poor practices.
Helen Rowell, who has taken responsibility for superannuation at APRA, has told trustee boards numerous times that their processes must evolve.
“APRA will want to be satisfied that there is appropriate board renewal process in place and being actively implemented,” she said in October to AIST members. “We are focused on ensuring there is the necessary expertise around the board table and that fresh skills and ideas are being brought in over time.” She has also explicitly said that independents should be considered as part of that process.
Indeed, as much as there is agreement that not all independents are perfect, there is the agreement too that trustees could improve their skills.
A leading investment consultant, who did not wish to be named, thinks there should be a proficiency test for investment knowledge and a mandatory requirement that a trustee completes an AIST trustee course on how markets and investments work.
“This minimum education standard is needed so they can understand the basic concepts of the things they are required to make decisions on. The most dangerous trustee is one that knows nothing about how markets work and then panics when things go wrong,” he says.
This view is backed up by a senior lawyer: “If I were to join a board I would start a bridging course to bone up. If I am hesitating, other people should be as well. There are many in the industry who could be seen as clueless and cannot see how the liability profile has shifted.”
For Vamos, superannuation funds should start from scratch in determining what skills and experience are needed on boards; and if this means that some are found wanting, then they should leave the fund. She believes this assessment should be done on a yearly basis, with the criteria ratcheted up a little each year.
“If you have not developed your thinking, your knowledge, your experience and the criteria has changed and you have not, then of course you are not going to be able to sit at the table anymore,” says Vamos. “Boards should now be thinking about succession. The mistakes some will make, is to not think about it, until the law is through. That is a failure.”
Another senior lawyer is convinced that the current system needs changing, largely due to many trustees being unable to fulfil the legal obligation to have a high level of comprehension about the investments they hold and the risk they adopt.
Robertson accepts change could be good, but says it should be started with a review of what is missing from the current system and how it can be approved.