The Australian Institute of Superannuation Trustees’ (AIST) submission, in reply to the draft legislation to change the governance structure of super funds, has heavily condemned the approach of the Government as risky and not supported by evidence.
By contrast, the Association of Superannuation Funds of Australia (ASFA) says the proposal reflects changing community expectations, the increased complexity and risk, and significantly higher regulatory standards and liability for super funds.
Both, however, agree the current draft legislation needs development as the one-size-fits-all approach will likely have unintended and detrimental consequences, because of the variety of structures and sizes across the superannuation sector.
ASFA list 13 recommendations addressing issues around independent chairs, the three-year transition period, disclosing whether the RSE licensee consists of a majority of independent directors, and the definition of ‘independent’ and ‘material relationship’.
“We must ensure that there is the flexibility to get the right people with the right experience, knowledge and skills on these boards,” said Pauline Vamos, chief executive officer of ASFA.
AIST takes a much stronger view.
“This is a sledgehammer approach to the boards of top performing funds that could lead to unintended consequences, as well as perverse outcomes,” said Tom Garcia, chief executive of AIST.
He added AIST has estimated the costs of the proposed changes as $20 million in the first year – costs that would ultimately be borne by members.
“The proposed changes will be a significant disruption and cost to the boards and members of not-for-profit super funds without the Government having produced any evidence that they will lead to better outcomes for members,” Garcia said.
The Government is taking its position based on two reports, the Cooper Review and the Murray Review. Both recommend independents should be appointed to boards.
Frydenberg is on record saying part of rationale for introducing independents was that other countries had moved to require independents on boards, adding that funds would not be denied the ability to maintain equal representation, but wanted to see the boards “infused” with additional expertise.
However, Garcia says this takes Australia in the opposite direction to the rest of the world by removing the legislative requirement to have member representation from boards of occupational-based retirement savings funds.
Additionally, the AIST said the changes do nothing to address the real and demonstrated conflicts associated with board structures in the retail superannuation sector.
In AIST’s analysis these institutions will still be able to appoint staff to form the majority of their superannuation board, and source the ‘independents’ from other boards of the same banking institution. Both groups main responsibility is to maximise profits for the bank’s shareholders.
AIST said the “plague of scandals” affecting customers, particularly in regards to financial planning, has not been originating from profit-to-members super funds. Nor have there been prudential failures or losses suffered by members in the industry, government and corporate sector.
“Yet these proposed changes will have a bigger impact on equal representation boards that the for-profit retail sector,” AIST said in its submission.
This will likely disrupt the governance structures of the sector that has consistently outperformed, providing the highest returns for members.
Another area under fierce criticism from AIST is the amount of power vested into the Australian Prudential and Regulatory Authority (APRA).
“These changes place the regulator in the role of being a law maker and a judge as well as jury. This is a serious breach of the rule of the law and gives APRA far greater powers than it currently has in other APRA-regulated industries, such as banking and insurance,” Garcia said.
When Investment Magazine asked for the Government’s perspective on the criticism raised by AIST, Assistant Treasurer Josh Frydenberg said: “I welcome all the submissions that have been provided on these important reforms to strengthen the superannuation system. The Government will now carefully review all submissions before finalising legislation to implement these reforms.”
