Protecting the profit-to-member ethos of industry, government and corporate super funds needs to be the top priority for the incoming chief executive of the Australian Institute of Superannuation Trustees, outgoing boss Tom Garcia says.
“If that profit-to-member way of being is not maintained, then there is not a huge difference between us and the retail funds,” he argues.
AIST is the peak body for industry, corporate and government superannuation funds. Garcia steps aside having recently completed a review of the organisation’s reason for existence, satisfied that it continues to fill an important niche.
“In 2016, we did a lot of research into what the value proposition was for AIST, and concluded that the distinguishing feature of our sector is the profit-to-member ethos,” he says. “Previously, our mission statement was to provide retirement income, but a peak body can’t actually do that, only a fund can do that, so we thought more carefully about what it was that AIST did to help funds deliver on that.”
Garcia says that as part of that strategic review, AIST considered “whether it was time to shut up shop”. Most of AIST’s member funds are also members of one of the two other super peak bodies that service profit-to-member funds: Industry Super Australia and the Association of Superannuation Funds of Australia.
“We questioned our reason for existence…I think it is a very healthy thing for an organisation to do…and through that introspection, we concluded that AIST is filling a very important role.”
The organisation is in the early days of a new three-year strategic plan designed to focus its efforts on protecting and promoting the profit-to-member model of its member funds.
Central to that will be continuing to fight to preserve the sector’s traditional practice of letting funds’ employer and union stakeholders each appoint an equal number of trustees.
Garcia spoke to Investment Magazine in the days before he officially stepped down as AIST chief executive on March 10, 2017, after four years in the role, having previously been policy and regulatory manager for two years. He announced his resignation in December 2016, having accepted the role of head of product at AustralianSuper, the nation’s largest industry fund.
At the time of our interview, Eva Scheerlinck had just been appointed AIST acting chief executive, as the board continued interviewing applicants for Garcia’s permanent replacement.
Scheerlinck has held the role of AIST executive manager, governance and stewardship, since 2010.
As a 25-year-old working his dream job changing tyres in the pit for car-racing legend Peter Brock at the Bathurst 1000, it would have seemed inconceivable to Garcia that he would wind up with a career in the superannuation industry.
The young mechanical engineering graduate got his first “real job” in a Sydney dairy before landing the gig with the Holden racing team’s tyre maker, Bridgestone. After a few years with Bridgestone, Garcia moved to rival tyre maker Michelin, where he spent nine years, ending up as head of engineering.
That last year at Michelin was tough.
“Michelin is an organisation with a lot of integrity,” Garcia says. “The company discovered there was a problem with some of its truck tyres and we had to go through an enormous recall. I was responsible for all the forensic analysis of a series of truck crashes. Fortunately, no one had died, but at the end of that process I was exhausted and needed a change.”
It was a bad investment decision that prompted Garcia to retrain as a financial planner.
“My interest in financial planning came about because I had bought a negatively geared property in an apartment block in Melbourne’s Docklands,” he recalls. “As a Sydneysider, I had been quick to believe that there was no way you could ever go wrong with a north-facing place with a water view…Well, it turns out when they release 6000 of them plenty can go wrong.”
In the wash up, Garcia became frustrated that no one could explain to him how negative gearing worked. It was then he decided his skills honed designing automotive parts could be put to work in financial advice – “engineering for people”.
“Luckily for me, my wife was very supportive of me making a career change, as I didn’t have an income for a while,” he says.
It turned out to be a move from literal car crashes to metaphorical ones.
“The first job I had in the financial planning industry was as a receptionist, and on my very first day, my first task was to ring 200 people and tell them they had to come in and see their planner because more than half of their super had been lost in the collapse of Westpoint Corporation,” he says.
It also soon became apparent that the rules for commissions were different in his new industry.
“It took me a little while to understand the game but what eventually gelled in my mind is that when you sell someone a tyre, you settle on the price and that’s the end of the deal. But in financial services, the hand just never came out of their pocket – whether performance was high or low – and that just didn’t sit right.”
Garcia made such realisations during the period from 2006 to 2007 – which he now leaves blank on his LinkedIn profile – before he joined Industry Fund Services Financial Planning as a paraplanner.
Industry Fund Services is owned by a collection of profit-to-member industry funds.
It was a better cultural fit for Garcia’s desire to help people make the most of their money.
During his time there, Garcia consulted to AustralianSuper as a subject matter expert on the development of their first pension product.
“I took the first phone call for the first AustralianSuper pension, eight years ago, and now I am going back there to work on the next wave of retirement income products.”
Garcia’s new role will cover all areas of product, but the development of Comprehensive Income Products for Retirement (CIPRs) will be a focus in the coming years. The government has stated it will soon require all default funds to offer retiring members a CIPR as an alternative to a lump sum or traditional account-based pension.
“The development of the CIPR framework is an incredibly important piece of policy that will shape the success of the super system over the next 25 years,” Garcia says.
One of the highlights Garcia counts among his proudest achievements as AIST chief executive is the launch of international study tours.
In recent years, AIST has conducted three study tours to Silicon Valley companies – such as Salesforce and Palo Alto Networks – where trustees and senior staff from member funds have learnt about the latest developments in technology, data and customer experience.
These complement AIST’s biennial international conference, Global Dialogue, which is designed to help expose local trustees to the best-practice ideas from major profit-to-member pension funds around the world.
In 2016, about 60 fund executives and directors travelled to Boston in the US to attend the 2016 AIST Global Dialogue at Harvard University. The next one will take place in Amsterdam, the Netherlands, in 2018. AIST was established to provide to the trustees of profit-to-member superannuation funds, but in recent years it has devoted an increasing proportion of its resources to engaging with Canberra types on policy development.
During Garcia’s tenure as chief executive, AIST has made “well over 200 submissions” to government policy reviews, another achievement he is “very proud” of.
“AIST’s relationships with the regulators are very, very good and those relationships are a continued strength for the organisation,” he says.
The industry, corporate and government funds that form AIST’s membership base are regulated in different ways by the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission, and the Australian Taxation Office.
In recent years, there have been a handful of big regulatory changes that have kept Garcia, as a super industry spokesperson, in the headlines. The super tax changes announced in the May 2016 federal budget are one obvious example.
Meanwhile, plans to force all super funds to make one-third of their boards independent directors, and a push to shake-up the default fund selection process, have pitted Garcia in a public battle against his counterpart for the retail super lobby, Financial Services Council chief executive Sally Loane. AIST’s collaboration with Industry Super Australia to commission Bernie Fraser to conduct an alternative governance review was controversial.
But it is less headline-grabbing policy work AIST has notched up during his tenure that Garcia sees as vital to his legacy. That includes accomplishments such as a major project with industry and regulators to rework the rules for how super funds must perform operational due diligence.
The term refers to how funds review the back-office administration and trading execution systems of their external fund managers – as distinct from due diligence on their investment strategies.
AIST helped facilitate an arrangement whereby fund managers now engage an independent operational due diligence provider to review their processes and then that report can be provided to any super fund considering investing with them.
“The benefit for our funds is that they don’t have to go pay for 40 or 50 of these reports, while the big advantage for the fund managers is that they don’t have to deal with 50 requests coming at them from different funds,” Garcia says. “It sounds like a boring achievement but that little project will save tens of millions of dollars for members over time.”
One of the most personally satisfying pieces of policy work for Garcia during his time as AIST chief executive was a 2015 research paper titled “Busting the $1 million retirement myth”.
“All the talk…getting a lot of coverage at the time about people needing at least $1 million in super to retire on just upset me a lot, so it was good to get out there with some real numbers to show that even a modest super balance helps,” he says. “I did a lot of radio around that research and it was just so satisfying to have pensioners ring up and say, ‘Thank you for telling me I didn’t fail.’ ”
Still more to do
Garcia departs AIST with a couple of big projects still on the boil. The most notable being the push to stave off the Turnbull Government’s plans to force all super funds to appoint a minimum of one-third independent directors, including an independent chair.
In February, to coincide with the release of the Fraser Review, which found no need to mandate independent trustees, AIST released a draft of a new governance code designed to lift the quality of boards at profit-to-member super funds.
AIST’s annual general meeting will be held at its Conference of Major Superannuation Funds on the Gold Coast, March 22-24, 2017, where members will vote on whether to adopt the governance code.
“I’m a bit sad I won’t be there to, hopefully, see that pass, but Eva [Scheerlinck] has put so much work into the governance code that it actually seems fitting it will be her.”
The Insurance in Superannuation Industry Working Group is another major project that will remain high on the agenda for the new AIST chief executive.
Garcia is worried about what would happen if group insurance within super were “thrown out with the bathwater” amid ongoing reforms to the broader life-insurance sector.
“Our entire industry needs to realise that group insurance is at risk and adopt a willingness to make significant changes quickly,” he warns. “The individuals involved in the working group all really get this and I am optimistic that can make a big difference.”
Asked what his top piece of advice was for whomever is named his permanent successor, Garcia says it is to not spread themselves too thin.
“There is so much to do, but with limited time and resources, it is important to focus on the big things that will make a material difference.