Governance is at the top of Assistant Treasurer Josh Frydenberg’s agenda for superannuation.

Frydenberg's key messagesSpeaking at the Financial Services Council (FSC) breakfast briefing in Sydney he said the Government believes the way to do this is by making sure there is an “appropriate number of independent directors” on superannuation fund boards arguing that this will help improve the decision making process by broadening the range of skills.

“I can see the motivation behind equal representation, but I can also read the recommendations of the Cooper review that recommended that super boards should move to at least a third independent directors, and now the David Murray recommendation that we should move to a majority independent with an independent chair.”

The question was put to Frydenberg that many retail funds already have majority independent boards yet perform worse than industry funds, so how would consumers be better off if this measure was pushed through?

Frydenberg replied that independents on the board would not hinder industry funds success but “should only improve their ability to do well.”

“As a government when you’ve got powerful recommendations from independent reports and committees you need to take that into account,” Frydenberg said. “The reason why I think there is merit in these proposals, and we haven’t decided where we are going to land, is that by bringing in outside directors you can bring in additional qualifications, expertise and insight into the board.”

When pushed for what evidence there was, even in the corporate sector, that independent directors improve the performance of companies Frydenberg said that sometime there are perceptions of conflict that need to be dealt with as well as the reality. He cited a number of other countries have moved to requiring independent directors and that as such it would seem a logical step for Australia.

He added funds wouldn’t be denied the ability to maintain equal representation, but wanted to see the boards “infused” with additional expertise.

“The other point I would make is that people stay in funds long after they finish employment and they deserve representation as well. They are no longer represented by their employer or by their employee groups. An independent director will help do that.”

On the topic of how to define an independent director, Frydenberg said that the ASX corporate governance principals gave a “pretty good sphere” and could be modified to take into account superannuation.

 

Other topics on Frydenberg’s agenda

Frydenberg is in favour of an agreed clear objective which will address the common criticism that the superannuation system lacks certainty and stability in policy settings, and wants to seek bipartisan support, but has yet to formally meet with the opposition.

The Shadow Treasurer Chris Bowen has previously voiced his support for an agreed clear objective on superannuation, with bipartisan support, at a roundtable with industry leaders held by Conexus Financial, the publisher of Investment Magazine, and Perpetual Investors.

Even without this yet to be agreed definition, the Government has committed to making “improvements” in the area of transparency as they want “consumers” to be able to compare the relative performance of superannuation funds, enabling them to choose the product that is right for them.

A further important setting the government wants is increased competition – and that’s why, according to Frydenberg, the Government wants to open up the default superannuation market “so that there is more choice”.

Tax in super

It looks unlikely for tax in superannuation to change prior to the next general election.

The process for a policy decision, should it follow the timetable Frydenberg laid out, is involved and extensive.

The government is taking submissions from interested individuals or organisations until June 1, and is encouraging views to be made known.

“We have not ruled anything in or out of consideration in the tax discussion paper. At this stage, we want to gather as many ideas as we can, and start to investigate and evaluate them.”

He added that later this year, after the submissions process, the Government will release an options paper which will seek the community’s views on possible reforms to improve the tax system. The Government’s final policies will then be put forward for consideration by the Australian people before the next election.

Increasing cross-border engagement

On the wider topic of financial services Frydenberg concluded that while the Australian financial sector is one of the largest and most sophisticated in the world, its engagement in cross-border activities within the Asia-Pacific region and beyond is low by international standards. A fact the Government wants to change.

To do this, it is pursuing five main recommendations made in the Johnson report:

  • Developing the Investment Manager Regime, which will encourage greater investment to Australia by providing tax certainty for foreign investors.
  • Issuing exposure draft legislation to create new tax system for managed investment trusts (MITs) that will modernise the tax rules for eligible funds and increase certainty for the industry and investors.
  • Improving and modernising the offshore banking unit regime, so advantage can be taken of opportunities to participate in international transactions and attract mobile financial sector activities.
  • Developing the Asia Region Funds Passport. Once implemented, the passport will allow the cross-border marketing of managed funds across participating economies in the Asia region.
  • Looking at broadening the range of collective investment vehicles.

Frydenberg said that these recommendations mean making necessary tax and regulatory changes that will make the financial services industry more globally competitive and increase exports of Australia’s financial services.