Marshalling one group of people to deliver on a complex objective for the benefit of another is a challenge. To succeed, the first group must accurately discern the interests (not just preferences) of the second, including when those interests are heterogenous or need to be balanced against others’ claims or societal concerns. Then, it must be competent to deliver on the objective, scrupulously (if not exclusively) loyal to the second group, and transparent in and accountable for the decisions and actions it takes.

When the Retirement Income Covenant (RIC) came into operation in July 2022, it created exactly this challenge for RSE licensees. As trustees of superannuation funds, they are required to deliver on the complex objective of converting Individual members’ accumulated savings into optimal retirement incomes. The Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) requires the trustee to “formulate, review regularly and give effect to a retirement income strategy that meets the requirements in section 52AA”. Section 52AA leaves it to each trustee to devise the strategy within broad parameters.

There are myriad difficulties in designing and implementing retirement strategies. In a survey conducted by the financial regulators and released in July 2024 (note 1), trustees identified common difficulties in implementing the covenant as including “uncertainty around the financial advice framework, privacy, security, and cost concerns on collecting more member data, and a lack of member engagement and financial capability.” The regulators’ predictable response was to express disappointment at trustees’ efforts, including in developing metrics to track “the success of their strategies”, without acknowledging that some of those difficulties are of successive governments’ making or are better addressed collectively.

Stewardship and accountability of directors

The challenge created by the RIC invites a reconsideration of the existing conventions of superannuation fund governance. Trustees need governance arrangements that support them in discerning retiring members’ interests, balancing them – both with those of other fund members and with systemic concerns such as financial stability and sustainability – and remaining loyal to them. The governance arrangements must ensure that the trustee has, or has access to, the competencies needed to develop and implement the strategy and to communicate it effectively to fund members and regulators. They must support transparency and – most importantly – promote effective accountability at the level of both the management team and the board. In the final report of the Perth Casino Royal Commission, released in March 2022, the commissioners (led by the Hon Neville Owen AO) described corporate governance, at a conceptual level, as “primarily concerned with the stewardship and accountability of the directors and officers of the corporation in respect of the interests of the corporation”. Superannuation fund governance is primarily concerned with the stewardship and accountability of the directors and officers of the trustee in respect of the interests of the fund members, acting fairly between them when their interests diverge.

That stewardship and accountability occurs within what Justice Owen described twenty years earlier in the HIH Royal Commission as “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled”. In superannuation, the “rules” include the legal requirements imposed on the RSE licensee and its officers by the SIS Act, APRA’s prudential standards relating to governance including SPS 510 and SPS 511, the Corporations Act 2001 (Cth) (including corporate, financial services and annual reporting laws), the fund’s trust deed, the trustee’s corporate constitution, and – from March 2025 – the Financial Accountability Regime. They also include the voluntary codes, norms and cultures of governance adopted across the different parts of the sector and by individual funds.

Many of the established conventions of corporate governance – including those expressed in the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations – do not translate easily to fund governance. And differences between accepted governance practices in corporate, retail, industry and public sector funds, and as between trustees with different ownership and capital structures or with equal representation and non-equal representation boards, make generalisations difficult.

Retirement strategy responsibilities

Nevertheless, some fundamental principles hold. The board of the trustee must, collectively, have the capability to oversee development and implementation of a viable retirement strategy by the management team. Nothing in superannuation law relieves individual directors of their fundamental duties as directors, including what one judge described as “the core irreducible requirement of directors to be involved in the management of the company and to take all reasonable steps to be in a position to guide and monitor”. This includes guiding and monitoring the delivery of a retirement strategy.

Directors of a superannuation trustee are not directly accountable to fund members in the way that directors of listed companies – who are elected by the general meeting – are to shareholders. This puts a heavy onus on those who control the composition of trustee boards to ensure directors have the knowledge and experience to anticipate likely risks and opportunities for members in the retirement phase. These arise across technical, regulatory, financial, commercial, behavioural and political dimensions. And all while ensuring the fund administration is up to providing the level of cybersecure customer service delivery expected by the regulators. This is not the same as needing people to represent the experience or preferences of retirees.

For now, it may be that funds will need to supplement their capability by forming specialist retirement committees to oversee management in delivering the retirement strategy, bringing in external expertise where needed. But, ultimately, the retirement buck stops with the slightly fewer than 500 individuals who occupy the seats at the trustees’ boardroom tables.

Notes

1.  Industry Update: Pulse check on retirement income covenant implementation. APRA and ASIC. 2024.

Dr Pamela Hanrahan is an Emerita Professor of the UNSW Business School and a consultant at law firm Johnson Winter Slattery. She is a member of The Conexus Institute Advisory Board.

 

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