OPINION | On September 14, 2017, the Turnbull Government introduced the Treasury Legislation Amendment (Improving Accountability and Member Outcomes in Superannuation No.1) Bill 2017 and the Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017 in the Senate.
While the bills do mean significant changes to the regulation and governance of superannuation funds, certain provisions need amending before they can achieve their full intent.
The reforms are directed towards implementing the government’s policy agenda of requiring superannuation funds to appoint independent directors, empowering the Australian Prudential Regulation Authority (APRA) to execute its regulatory mandate and strengthening the MySuper regime. The reforms also respond to calls from independent senators for funds to hold annual members’ meetings.
No doubt the precise drafting of the bills will come under close scrutiny when they are examined over the coming month by the Senate Economics Legislation Committee. There are numerous gremlins lurking in the fine print; however, the key points of the two bills are:
- An intensification of the ‘scale’ test that trustees of funds containing MySuper products have to perform. Trustees must now assess a wider range of characteristics of their MySuper product, and compare them with other MySuper products. The results must be published on the fund’s website within 28 days.
- The availability of criminal sanctions for breaches of the director covenants.
- A requirement that APRA approve changes in the ownership or control of Registrable Superannuation Entity (RSE) licensees.
- APRA will have the power to issue a wide range of directions in a wide range of circumstances, extending even to directing an RSE licensee “to do, or refrain from doing, anything” in relation to the fund.
- Revision to which holdings an RSE licensee must disclose publicly every six months.
- A requirement that each superannuation fund have an annual members’ meeting, at which members have an opportunity to ask questions.
- APRA to have the power to require RSE licensees to disclose information about payments to third parties, and the ways that money is used.
- The boards of all RSE licensees to have at least one-third independent directors and an independent chair.
Do these reforms live up to their promise of improving accountability and member outcomes?
Some of the initiatives are decidedly peculiar.
Take the requirement that funds publicise their scale-test results. On a MySuper product, this would seem to increase the risk to disengaged members, those who are most likely to be left behind when the fund’s more aware members realise that their own trustee doesn’t believe the product is sustainable.
It is also difficult to see the rationale for an annual members’ meeting that has no decision-making role in the governance of the fund. Trustees already have legal obligations to answer member questions in a timely manner. If an annual members’ meeting is to provide something meaningful, both in terms of transparency and accountability, it needs to be more than the opportunity for member grandstanding that it now appears to be.
Some might also wonder whether a trustee would be able to disclose how a third party to whom it has made a payment has used the money.
Issues of independence
There are also problems with requirement for independent directors. The definition of independence in the Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill will almost certainly miss the mark. The nominees of unions, employers and employer groups need not be officers or employees of those organisations (as the bill currently requires) for their independence to be compromised.
Ironically, the only boards affected would be those of Financial Services Council members using external directors who serve on multiple group boards and satisfy the FSC definition of independent but not the definition in this bill.
Just as troubling, no thought appears to have been given as to how these new independent directors would be appointed to boards. If it’s simply via existing members, it seems reasonable to expect that the current schism that supposedly exists between the two tribes on an equal representation board would simply be replicated by the new appointments.
The employee representatives would appoint their independent directors, and the employer representatives would do the same. Nothing of substance would be achieved.
Clearly there is more work to be done. Industry participants may cavil about the reforms or they may support them, but if the reforms do not even promote the objectives that are said to inspire them, then all have an interest in rolling up their sleeves and trying to make them more workable.
At least, that would seem to be a better member outcome.
Scott Donald is deputy director of the University of NSW’s Centre for Law, Markets and Regulation and an external consultant to Herbert Smith Freehills.