Forcing trustees to tell the prudential regulator why a prospective fund merger has fallen over and to assess and report on the performance of boards and individual directors annually were two recommendations the Productivity Commission made in its attempt to crack down on poorly managed superannuation funds.

With the 31 recommendations the Productivity Commission detailed in its final report on the efficiency and competitiveness of the $2.7 trillion super sector, fund trustees were put on notice that more empowered regulators could have the potential to scrutinise their inner workings at a more granular level.

Merger scrutiny

The 722-page report, released on Thursday called on the government to require that trustee boards of all Australian Prudential Regulatory Authority-regulated superannuation funds disclose to the regulator when they enter a memorandum of understanding with another fund in relation to a merger attempt.

This was something first earmarked in the commission’s 2018’s draft report.

“For mergers that ultimately do not proceed, the board should be required to disclose to APRA (at the time) the reasons why the merger did not proceed, and the members’ best interests assessment that informed the decision,” the PC stated. “APRA should also be empowered to prevent mergers that are not in members’ best interests.”

Finally the PC recommended that APRA The report annually to the Council of Financial Regulators on funds’ progress with implementing the elevated outcomes tests and on fund merger activity.

The Australian Institute of Superannuation Trustees Eva Scheerlinck said this suggestion was “flawed”.

It assumes that a small number of funds of significant scale is the best outcome for the system. We don’t agree. Not all smaller scale funds underperform -indeed, many have outperformed industry benchmarks. They deliver great outcomes to members and find ways, such as through joint ventures, to limit costs and access investment deals.

Peter Haysey, deputy chair of Catholic Super Fund, was grilled during the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry about the fund’s arduous and ultimately unsuccessful attempt to merge with Australian Catholic Superannuation.

There are 198 APRA-regulated funds, a number the corporate regulator has made no secret of wanting to see reduced. In August last year, it wrote to the boards of the worst performers, saying they should make changes or they risked being shut down.

“I’m particularly pleased to see the Productivity Commission back our call for Parliament to pass legislation that would give APRA greater powers, including to direct superannuation licensees to take specific actions, such as merging or winding up, should that be in the best interests of members,” APRA deputy chair Helen Rowell said in a statement.

Trustee performance

The PC report also restated its position that APRA should more clearly demand trustees of all superannuation funds both have and use an effective process to assess their board’s performance.

Trustee boards should have a skills matrix and publish a consolidated summary of it every year, along with the collective skills of the trustee directors, the commission wrote.

“The evaluation should consider whether the matrix sufficiently captures the skills that the board needs (and will need in the future) to meet its objectives, and highlight any capability gaps,” the PC’s report stated. “APRA should be provided with the outcomes of such evaluations as soon as they have been completed [and] trustee board directors [should be required] to have a professional understanding of the superannuation system and investment decision-making, gained either through industry experience or formal training.”

The PC restated that the federal government ensure that there is no legislative impediment to APRA defining what constitutes an ‘independent director’, or to superannuation funds appointing independent directors to trustee boards.

Merger scrutiny

At the same time, the PC called on the government to require that trustee boards of all APRA-regulated superannuation funds disclose to the regulator when they enter a memorandum of understanding with another fund in relation to a merger attempt.

This was something first earmarked in the commission’s 2018’s draft report.

“For mergers that ultimately do not proceed, the board should be required to disclose to APRA (at the time) the reasons why the merger did not proceed, and the members’ best interests assessment that informed the decision,” the PC stated. “APRA should also be empowered to prevent mergers that are not in members’ best interests.”

Finally the PC recommended that APRA The report annually to the Council of Financial Regulators on funds’ progress with implementing the elevated outcomes tests and on fund merger activity.

The Australian Institute of Superannuation Trustees Eva Scheerlinck said this suggestion was “flawed”.

It assumes that a small number of funds of significant scale is the best outcome for the system. We don’t agree. Not all smaller scale funds underperform -indeed, many have outperformed industry benchmarks. They deliver great outcomes to members and find ways, such as through joint ventures, to limit costs and access investment deals.

Peter Haysey, deputy chair of Catholic Super Fund, was grilled during the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry about the fund’s arduous and ultimately unsuccessful attempt to merge with Australian Catholic Superannuation.

There are 198 APRA-regulated funds, a number the corporate regulator has made no secret of wanting to see reduced. In August last year, it wrote to the boards of the worst performers, saying they should make changes or they risked being shut down.

“I’m particularly pleased to see the Productivity Commission back our call for Parliament to pass legislation that would give APRA greater powers, including to direct superannuation licensees to take specific actions, such as merging or winding up, should that be in the best interests of members,” APRA deputy chair Helen Rowell said in a statement.

Alice Uribe is the editor of Investment Magazine’s print and digital platforms. Uribe has been working as a journalist, editor and digital producer for more than 10 years.