Scrutiny on super fund trustees has intensified since the introduction of the members’ best financial interests duty as part of the Your Future, Your Super (YFYS) reforms requiring trustees to prioritise members’ financial interests over their non-financial ones. Currently under review by Treasury, the YFYS performance test was part of the reforms introduced by the Morrison government in 2021.
The changes also reversed the burden of proof in civil litigation against trustees with a presumption that a trustee did not perform his duties and exercised power in the best financial interests of the member unless there is evidence to the contrary.
“There’s been a really an intense focus on trustee accountability and that’s reflected in the changes,” KPMG partner Lisa Butler-Beatty said. “From a really practical perspective, it comes down to how a trustee makes the decision [and] that process of decision making.”
She said there is also a great focus on financial metrics and how those metrics are intended to link to the interest of members.
Butler-Beatty made these comments ahead of the annual Chair Forum in Healesville later this month, an annual gathering of super fund chairs to discuss best practice and key issues affecting trustee boards.
Decision making process critical
The most critical issues for a trustee and a board are ensuring they have comfort around the process by which decisions come to the board, and also comfort around decisions that are made by management on behalf of the trustees under delegation according to Butler-Beatty.
“What we normally recommend to trustees is really thinking about documenting a decision-making framework,” she said.
Decision making by a trustee board can be broken down into eight broad steps beginning with identification of the proposal and decision to be made.
If needed, there will also be consultation and consideration of the business plan, expected member outcomes, relevant stakeholders and external support; along with gathering of relevant data, insights, evident and external advice.
Finally, there is assessment of the expected member impact in terms of members’ financial interests; a decision on whether the proposal is in the best financial interests of members; documentation of the decision including the assessment; and implementation and review of decision if intended outcomes were achieved.
“What’s important is that you go through these steps, that you identify the scope of the decision to be made, look at your conflicts, you gather the information that you need and critically, you assess it,” Butler-Beatty said.
“This is where those financial interests, those financial metrics, the impacts for members, in terms of members financial interests are really critical is this assessment point.”
She said it is unclear whether there will be further changes to trustee obligations under the current YFYS review undertaken by the current government, however the industry would like to see change to the onus of proof burden.
“What the industry would like to see is a reversal of the reversal of the onus of proof because that does feel like a tremendous burden for trustees and perhaps a step too far,” she said.
Butler-Beatty said APRA has been focusing on financial factors and metrics and drawing deeper insights from the evidence trustees beyond the best financial interests duty but also in respect to member outcome assessments and retirement income strategies. The regulator is also looking at various expenditures including marketing spend, sponsorship and political donations.
She said another area of focus is the outsourcing to third parties, especially any conflicts of interest. “When a trustee is determining or making a new decision about their service providers, or reviewing and monitoring their existing service providers, APRA is linking that to the best financial interests obligation.”
“Critically when trustees are considering or already outsource to a related party within their own internal group, ensuring that before you get to that best interests decision that conflicts are managed.”
