Board issues hinder industry super funds

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.

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."

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