It has become fashionable – particularly with the current discussion stemming from the Financial Systems Inquiry – to compare super funds to banks. This is particularly so when the talk turns to governance.
Speaking at the recent ASFA conference in Melbourne, the former Federal Treasurer Peter Costello commented that super funds should be subject to the same standards of governance that already applied to banks. Mr Costello said the industry needed to evolve and lift governance standards, particularly now that super was bigger than the banking industry in terms of money under management.
This perception – that superannuation is still a cottage industry with out-dated and flimsy governance structures – is at odds with reality. Super funds already have governance standards higher than banks.
Mr Costello admitted that in his current role as chair of the Future Fund he hasn’t kept a close eye on all 33 of the legislative changes that have occurred in superannuation since he was as Treasurer.
Fair enough, but, by not drilling down on the detail, it appears Mr Costello has failed to grasp the significance of recent legislative changes that have far-reaching consequences for super fund boards and their directors.
The recent reforms have fundamentally changed the governance landscape for superannuation to the extent that the duties and obligations now imposed on super fund directors are all that the banking industry faces – and more. They are the key reason why Australia’s super industry is recognised the world over as a governance leader.
Regardless of whether they sit on the board of a not-for-profit or a for-profit super fund, super fund directors operate in a climate of heightened legal obligations and regulations, underpinned by harsh penalties.
Breaches can lead to legal action and directors can be held personally liable for the payment of monetary penalties and, in extreme cases, end up in jail.
The introduction of APRA’s 12 new prudential standards in 2013 including new fit and proper processes – together with key amendments to the SIS Act – has significantly raised the bar on the level of skill, duty of care and due diligence required of directors. Even before these standards came into play, Australia was ranked third out of 18 countries in relation to governance – this ranking has now improved to second following the StrongerSuper reforms.
Additionally, there is the trust structure, which requires superannuation trustees to take extra care as fiduciaries of other people’s money. This is currently not required of bank directors, though interestingly, the European Union recently commented in relation to EU bank directors that “the creation of a specific duty for the board of directors to take account of the interests of depositors and other creditors in their decision-making (‘duty of care’) could help encourage the board of directors to adopt less risky strategies and improve the quality of the financial institutions long term risk management.”
AIST has compared the obligations of APRA-regulated funds with the ASX corporate principles – principle by principle. With the exception of one or two grey areas (notably the different interpretations and definitions of independence across the industries), just about every ASX principle – on board terms, board evaluation, skill set, and remuneration committees through to auditing, disclosure and risk management – is matched by a similar APRA or SIS requirement for super funds.
At last year’s AIST Fund Governance Symposium, the chair of a leading Australian law firm who was invited to reflect on remuneration practices from the perspective of corporate Australia said he was astonished to learn of the obligations placed on super fund directors.
Sitting on the board of a super fund is not a job for the faint-hearted, the time-poor or those looking to wind down from the hectic pace of full-time work. Trustees are very cognisant of their responsibilities and there has been a greater focus on training and improving risk management frameworks.
Super fund governance requirements not only match the vast majority of the corporate governance requirements for banks and insurers – including ASX listed principles – they have higher governance responsibilities because
of the overarching requirement to act in the best interests of members
as required under trust law and codified in legislation.