OPPOSITION finance spokesman Andrew Robb took aim at the country's $400 billion-plus industry super fund sector yesterday, saying there was a stench that had its roots in a cultural problem inside the unions and the ALP.
Robb made the comments as new allegations emerged that Electrical Trades Union Victorian state secretary Dean Mighell was under investigation over the sale of his union's majority stake in a financial advisory company, Southern Alliance Financial Services, allegedly at a price well below its market value.
Whether these allegations have merit or not given the tit-for-tat spat between the Victorian and New South Wales branches of the ETU, it highlights some of the problems facing industry funds, including the structure of the boards, the difficulty in removing trustees and conflicts of interest.
It seems every month a new controversy emerges in the sector, whether it be conflicts of interest, questionable governance or lack of transparency when it comes to the relationship with its trade union affiliates.
Last month it was the Health Services Union, before that the failed merger of Vision Super and Equipsuper and before that the investigation by APRA into MTAA Super, as well as a payroll tax investigation into the MTAA motoring trade organisation.
Over the past decade, industry funds have consistently outperformed retail funds largely due to lower fees and less exposure to equities. This has enabled various governments to turn a blind eye to their poor stands of governance. But the GFC changed all that and put the spotlight on some serious deficiencies.
The government has made some inroads into cleaning up governance issues in the super fund industry, including agreeing to make remuneration more transparent, but it has refused to look into the composition of boards, arguably to keep the unions on side.
It is an issue that needs to be resolved as most industry fund trustees are appointed to the boards in equal numbers by unions and employer groups and cannot be sacked, no matter how incompetent.
The Cooper review, released in late 2010, questioned the financial expertise and professionalism of union and employer trustees who are appointed under the "equal representation" model.
The Gillard government, led by Bill Shorten, opposed changes to board composition. Senator Mathias Cormann said yesterday if Shorten failed to act, a future Coalition government would.
The failed Equipsuper-Vision Super deal shows that as long as the present structure remains in place, industry fund consolidation will be held back by vested interests.
In the case of the ETU, a lot of money has been spent looking into alleged conflicts of interest. Last year, Mighell lodged a statement of claim in the Federal Court seeking the repayment of $1.8 million from Bernie Riordan, who at the time was NSW secretary of the ETU. The lawsuit centred on the fees Riordan collected as a director of the industry super fund for ETU members, the Energy Industries Superannuation Scheme, as well as affiliates FuturePlus and Chifley Financial Services. The claim was withdrawn in February. A month later, Riordan was appointed a commissioner of Fair Work Australia.
The EISS is trying to sell its third-party administrator, FuturePlus, as well as its stake in Chifley Financial Services.
The EISS became enmeshed in controversy when APRA raised concerns over structural changes and executive departures at FuturePlus, which is EISS' administration arm. The Audit Office of NSW said in an audit opinion of EISS published last year that the fund might have to provide funding to FuturePlus to remain compliant and that trustees might have to consider a merger of the super fund to ensure an efficient structure. "EISS may need to provide funding to FuturePlus to support infrastructure investments to comply with the proposed Stronger Super regulatory reform," the NSW auditor-general said.
In March, Riordan resigned from the ETU and a month later resigned as chairman of FuturePlus. He was on the board of EISS since 1998 and chairman of the investment committee since 2002. He resigned last year.
The Health Services Union scandal illustrated the need for change in terms of giving super boards a greater say in firing trustees. In most cases trustees are appointed to the boards of industry funds and therefore cannot be sacked, no matter how incompetent or conflicted. In the case of First State Super, it had on its board Michael Williamson, who was also the boss of the Health Services Union. Williamson and Craig Thomson are facing allegations they received secret commissions and questionable payments to suppliers to the union. Williamson and Thomson deny any wrongdoing.
In April, the chairman of First State Super told the media it was frustrating that he was unable to remove Williamson from the board. Williamson has since stepped down.
With super funds making decisions on the fourth-largest pool of managed money in the world, largely built from compulsory savings, real changes are needed, not just tweaking.
As Robb says: "It is reaching a point where they are influencing large amounts of money and through these funds are owning stakes in some very large companies. It's time for change and more transparency."
Frequently Asked Questions about this Article…
What recent controversies have affected Australia’s industry super funds?
The article cites a string of controversies including allegations over the sale of Southern Alliance Financial Services linked to the ETU, disputes within the ETU, the Health Services Union scandal, the failed Vision Super–Equipsuper merger, APRA investigations into MTAA Super, and inquiries into EISS, FuturePlus and Chifley Financial Services.
How do conflicts of interest and board structure create problems for industry super funds?
Industry funds often use an equal representation model with trustees appointed in equal numbers by unions and employer groups. The article says this can lead to conflicts of interest, difficulty removing trustees, and decisions influenced by union affiliations rather than pure financial governance.
What did the Cooper review find about the expertise of super fund trustees?
The Cooper review questioned the financial expertise and professionalism of union and employer trustees appointed under the equal representation model, suggesting some trustees may lack the qualifications needed for complex fund governance.
Has the government taken steps to improve super fund governance?
According to the article, the government has made inroads such as requiring more transparent remuneration, but it has resisted changing board composition, a move critics say preserves union influence over trustee appointments.
Can industry super fund trustees be removed if they are incompetent or conflicted?
The article explains that in most cases trustees appointed under the equal representation system cannot easily be sacked, even when there are allegations of incompetence or conflicts. High-profile examples show boards have struggled to remove trustees, although some have stepped down amid pressure.
Do industry super funds still outperform retail funds despite governance concerns?
Yes. The article notes industry funds have consistently outperformed retail funds over the past decade, largely because of lower fees and less exposure to equities. However, the global financial crisis exposed governance deficiencies that people now want addressed.
How could these governance issues affect my superannuation balance?
Governance problems can increase risk to members through potential conflicts of interest, inefficient administration, unexpected funding needs (for example, a fund possibly having to support its administrator), and slowed consolidation that might otherwise lower costs—factors that can indirectly affect returns and fees.
What reforms are being suggested to make industry super funds more transparent and accountable?
The article calls for more than tweaks: greater transparency, reforms to board composition, and giving boards more power to remove trustees. Political figures mentioned include calls for change if current leaders don’t act, and the Cooper review’s recommendations on trustee expertise are cited as a basis for reform.
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