Superannuation funds would be banned from raising capital from members and instead be forced to turn to shareholders to cover fines for misadministration and compensation payments, under recommendations included in the third interim report of the Senate Economics References Committee inquiry into improving consumer experiences, choice, and outcomes in Australia’s retirement system.
The proposals, if adopted, could see trustees of profit-to-member super funds plunged into insolvency if they incur fines for even relatively minor breaches of the law, as previously flagged by APRA.
The interim report tabled in Parliament on Thursday focuses on what committee chair, the Coalition Senator for NSW, Andrew Bragg said is “the shocking governance standards undermining the superannuation sector, which have let down millions of Australians”.
Bragg said the interim report’s package of recommendations addresses “conflicts, competence and independence within the sector”.
Its recommendations include that the Australian Prudential Regulation Authority (APRA) to report on the Best Financial Interest Duty (BFID) compliance of super funds; that trustee boards have a majority of independent directors, and an independent chair; that competency rules be applied requiring that super fund directors and chairs have relevant experience; and that mandatory insurance service standards be developed in consultation with consumer advocates, regulators and industry stakeholders.
But the potentially most contentious recommendation is that superannuation funds should source funding from shareholders rather than from members “to meet the various costs to which they may be liable”.
The interim report said these costs could include fines for trustee misconduct, and compensation payments resulting from misadministration. The interim report recommends this funding should “not be provided for, directly or indirectly, by members’ funds and must come from the shareholders”.
This recommendation addresses the issue of super funds deducting amounts from members’ assets (via administration fees and the like) to establish so-called financial contingency reserves for the express purpose of paying fines and other penalties.
Trustees personally liable
After the Hayne royal commission, section 56 of the Superannuation Industry (Supervision) Act was amended to provide that superannuation trustees should be personally liable for the fines they incur, and that they could not use members’ funds to pay for fines or penalties caused by the trustees’ actions.
However, in late 2021 a number of funds sought and received court advice and direction to amend their trust deeds so they could deduct amounts from members’ assets, to establish reserves to cover trustee penalties.
Trustees whose shareholders are defined or restricted by their articles or constitutions – for example, where specific unions or employer associations are the only entities permitted to hold shares in the trustee and to appoint directors – could face significant issues raising sufficient capital any other way than from members, and could find themselves in a position where they could not afford even a modest breach of the regulations.
One such example cited in the interim report is where a trustee is fined $11,100 for submitting data to APRA one day late – could leave them insolvent. The interim report quotes APRA executive bord member Margaret Cole’s opening remarks to a House of Representatives Standing Committee on Economics hearing in February 2022 as saying: “A disorderly failure of an otherwise sound and sustainable licensee would be likely to be severely detrimental to members, as it would likely impose material costs and create significant operational risks.”
The interim report quotes Cole at the same hearing as saying: “The courts concluded that the charging of a fee of this nature is not inconsistent with the amendments to section 56(2) and section 57(2) of this act.”
However, the interim report said the committee is “concerned that fund members are now paying higher fees as a result of these trust deed amendments and that this outcome does not align with the original intent of the [SIS Act] bill”.
Risk fees
The interim report notes that AustralianSuper amended its trust deed to impose an annual “risk fee” on its members of 0.015 per cent of fund assets, or roughly $35 million, and that “several other super funds, including Cbus Super, QSuper, Hostplus, and Spirit Super sought court approval to use members’ money to pay fines incurred by directors”.
The 2024 annual report for United Super – the trustee of Cbus – shows that cash receipts from trustee fees increased by almost 250 per cent year-on-year, from $5.8 million in the year to 30 June 2023 to $20 million in the subsequent financial year, and the trustee’s cash reserves had increased commensurately.
The interim report said the committee considers it is “inappropriate for superannuation fund members to fund trustee risk reserves to pay for fines and penalties incurred by trustees who act inappropriately – especially when they, and their related organisations, generally have access to significant resources which could bedrawn upon instead of members’ funds”.
“As such, the committee considers that all funds, including profit-for-member funds, such as Cbus and AustralianSuper, should maintain access to separate funding to meet the various costs to which they may be liable, including trustee penalties and compensation payments,” it said.
“Members should never be liable for these penalties and payments – directly or indirectly.”
The report also took issue with APRA appearing as a friend of the court when funds applied for trust deed amendments, claiming that by “facilitating trust deed amendments permitting the raising of risk reserves to pay for trustee misconduct the prudential regulator, APRA, has not acted in the best interests of superannuation fund members”.
Super Members Council (SMC) warned that the recommendation for non-financial shareholders to pay regulatory fines does not exist in any other business context and would force non-financial shareholders to have to raise hundreds of millions of dollars for liabilities they may never need to pay.
SMC chief executive Misha Schubert said the association is concerned that the interim report attacks the foundations of the profit-to-member fund structure.
“We do not support proposals that would undermine or dismantle a successful model that has delivered strong returns for members for over three decades,” Schubert said in a statement provided to Investment Magazine.
“As in any other sector, profit-to-member funds strive to continuously strengthen governance processes and procedures. But the report’s recommendations would fundamentally alter super funds’ structure in such a way that it would be almost impossible for profit-to-member funds to exist.”
Schubert said this would effectively disenfranchise the 11 million Australians who “choose to have their retirement savings managed by a profit-to-member fund with equal representation – and risk making them poorer in retirement”.
An ‘unserious’ report
The interim report has also raised the ire of the inquiry’s own deputy chair, Labor Senator for Victoria Jess Walsh.
Walsh has slammed the release of the interim report after committee members were “once again given less than 24 hours to consider” its contents and recommendations, and tabled a Government Senators’ dissenting report.
In a statement and in the dissenting report, Walsh accused Bragg of tabling “an unserious, unsurprising report reflecting nothing more than his long-held loathing of Australia’s superannuation system, and the critical role of unions within it”.
“Across three interim reports, the only suggestion Senator Bragg has offered for improving Australia’s retirement system is to dismantle the best thing about it – our world-leading superannuation system,” Walsh said.
“Senator Bragg has made no serious effort to produce bipartisan recommendations on innovation for Australia’s retirement system – the terms the Senate approved for this Inquiry. Not one Australian will have one dollar more for their retirement savings as a result of this 15-month inquiry.”
Walsh claimed the committee chair “failed to call for submissions to inform the interim report on superannuation fund governance”, and that “across three interim reports solely targeted at dismantling superannuation, [the chair has] failed to address the terms of reference for this inquiry, which centre on innovations to Australia’s retirement system”.
| The recommendations in full
Recommendation 1 Recommendation 2 Recommendation 3 Recommendation 4 Recommendation 5 Recommendation 6 Recommendation 7 Source: Senate Economics References Committee inquiry into improving consumer experiences, choice, and outcomes in Australia’s retirement system, third interim report. |
