Tom Garcia, chief executive of the Australian Institute of Superannuation Trustees, sees headaches ahead from proposals to mandate more independent trustees.
After some years of debating the board composition of superannuation funds – in particular, the true meaning of director independence – we now have draft proposals from both the government and the regulator to consider.
AIST – which opposes government disruption of board composition of not-for-profit super funds – has a number of concerns with these proposals.
This isn’t nit-picking or simply being obstructionist. There is a lot more to these changes than at first meets the eye: certain proposals not only breach the rule of law – through the regulator being put in the awkward position of being both ‘judge’ and ‘jury’ – they may be unworkable.
In particular, the government’s proposed definition of independence – together with moves to give APRA complementary powers to determine whether a director has the capacity for independent judgement – is causing concern not only within the super industry, but also across the wider legal fraternity.
AIST contends that it is highly inappropriate that APRA will be placed in the role of being policy maker (eg, defining terms in the legislation), judge (if that person is ‘independent’), as well as jury (regulator and supervisor of the trustee board) as a consequence of the proposed reforms.
That’s quite a few hats.
The proposed definition of independence is equally clunky and would preclude many highly skilled and experienced people from joining a super fund board.
Removing equal representation from the SIS legislation is another concern. This will remove a guaranteed member (and employer) voice from not-for-profit boards, despite member representation being internationally recognised as best practice governance among pension funds.
While it is relatively easy to debate the principle of independence, it is another thing to legislate for true independence of mind.
While AIST supports funds being able to appoint up to a third of independent directors, we have long argued that representative trustee directors (ie those appointed under the equal representative model) have independence of mind. The structural conflicts – which exist in the retail sector between the duties of executives as directors and their duties as shareholders to maximise profit – simply do not exist in equal representative super funds.
Moreover, super fund directors already operate in a climate of heightened legal obligations and regulations, underpinned by harsh penalties. Further enhancing the regulator’s power and allowing the government to mandate the board composition of super funds is unwarranted, particularly when no evidence has been put forward that this will improve outcomes for the members of not-for-profit funds, which have long out-performed.
Far from benefitting members, legislating for a one-size-fits-all governance model that ignores the two very different ownership and operating structures of the retail and the not-for-profit super funds is likely to lead to unintended consequences and perverse outcomes.