The union-backed industry super fund movement scored a tactical victory in late 2010 when the Minister for Superannuation, Bill Shorten, released the government's response to Jeremy Cooper's superannuation system review, but the tide is turning. Shorten is pressing hard now for fundamental changes in how the industry funds are structured.
In December 2010 the government gave the green light to the Cooper report recommendations including the creation of the MySuper low-cost superannuation default fund option.
It sent recommendations for increased disclosure out for consultation, however, and flatly rejected a key proposal, for the compulsory half-and-half employer-employee balance on industry super fund boards to be replaced by a three-way split between employee representatives, employer representatives and independent, non-aligned directors.
Recent discussions involving Shorten and the industry funds have put Cooper's board proposal and increased disclosure squarely back in the frame, however, and it's not hard to see why. Many industry funds believe that they are being unfairly singled out for governance reform: but the political pressure for reform of the industry funds as part of a general overhaul of the funds management industry is intensifying.
The performance gap between industry funds and private sector retail funds has narrowed since the end of the first stage of the global crisis in 2009, as heavier retail fund exposure to sharemarkets pays off. According to industry data, industry funds returned 1.8 per cent in the year to end of February, just below a return of 2.2 per cent for retail master trusts. Over three years, the retail trusts returned 10.5 per cent and industry funds returned 9 per cent.
Longer-term statistics still favour the not-for-profit funds, however (that's industry funds and government funds, basically). They turned their heavier ownership of unlisted assets including property and infrastructure into an average return of 6.2 per cent a year over the last eight years, comfortably above an average return of 4.6 per cent for the retail funds management sector.
The performance gap is larger than those numbers indicate, because retail fund management fees were about 1 percentage point higher over the eight-year period.
It's also an inconvenient fact for critics of industry funds including the Coalition that the governance record of the industry funds is relatively clean. In a family of about 80 non-for-profit funds there have only been two comprehensive interventions and board restructurings, of Host Plus Super in 2003, and MTAA Super last year.
The climate has changed since Shorten gave short shrift to Cooper's board restructuring proposal in 2010, however.
A six-year rise in the super guarantee from 9 per cent to 12 per cent that begins next year underpins industry fund flows but also raises the fiduciary bar for the entire industry.
The financial regulator, the Australian Prudential Regulation Authority, is taking on new regulatory powers, and based on the two big industry fund makeovers, it favours the Cooper report's board template.
The role the industry funds play as default funds in awards is also being examined by the Productivity Commission ahead of the introduction of the MySuper option, and the group that represents the biggest industry funds, the Industry Super Network, has already said that long-term fund performance should be the prime selection criteria.
The Health Services Union affair has also focused attention on the governance of union-related entities generally, and spilled into the super arena through the position HSU boss Michael Williamson held on the board of First State Super as a representative of Unions NSW. Williamson resigned as vice-president of Unions NSW and stood down from State Super's board last week, but not before his position had highlighted that under current laws the boards of industry funds do not have the power to remove directors.
The focus on payments to super fund board members and fund managers and the disclosure of them has also been tightening steadily since the Cooper review came out.
Retail funds have been scrutinised too, of course, but early last month their industry organisation, the Financial Services Council, announced that its members would be required to appoint an independent chairman and a majority of independent directors, and expand their disclosure. Shorten is signalling to the industry funds that they need to come up with something similar.
Opposition to change from the industry funds is still considerable. The industry funds have outperformed the retail sector long term, and have by and large been well run. They could consider introducing more "non-aligned" or independent board members as Shorten wants, but they will argue that any change should be voluntary, and that new directors should be chosen by the existing boards, not an external body such as APRA.
It is possible that if talks do not produce changes soon, Shorten's message will become blunter. The government always has the option of unilaterally imposing new standards.
But the industry funds will be aware that if they do nothing or next to nothing for 18 months they will in all likelihood be facing a Coalition government that sees the industry fund sector as a union-designed $300 billion-plus gravy train that is ripe for deconstruction. One of Shorten's pitches has to be that the industry funds should pre-empt a Coalition attack and build their defences by embracing governance changes now.
mmaiden@theage.com.au
Frequently Asked Questions about this Article…
What was the Cooper review and what changes did the government accept, including MySuper?
The Cooper review recommended a package of superannuation reforms. The government backed key recommendations including the creation of MySuper — a low‑cost default superannuation option — and put proposals for increased disclosure out for consultation. At the time the government rejected Cooper’s proposal to change industry fund boards to a compulsory three‑way split, though that board idea has since been re‑opened for discussion.
Why are industry super funds under renewed pressure for governance reform?
Political pressure has intensified: the Minister for Superannuation has pressed for board and disclosure changes, regulators like APRA have gained new powers and reportedly favour Cooper’s board template, and reviews such as the Productivity Commission are examining the role of default funds ahead of MySuper. High‑profile issues such as the Health Services Union affair have also focused attention on union‑related governance and board appointments.
How have industry super funds performed compared with retail funds in recent periods?
Shorter‑term returns showed retail master trusts edging ahead: industry funds returned about 1.8% in the year to end February versus 2.2% for retail master trusts, and over three years retail trusts returned about 10.5% versus 9% for industry funds. However, over longer periods industry (and government) not‑for‑profit funds have outperformed: over eight years they averaged about 6.2% a year versus roughly 4.6% for retail funds — a gap that’s larger once higher retail fees (about 1 percentage point higher over that period) are taken into account.
What board changes did the Cooper report propose and why does it matter for everyday investors?
Cooper proposed replacing the compulsory half‑and‑half employer/employee board split in industry funds with a three‑way split: employee representatives, employer representatives and independent, non‑aligned directors. The idea is to boost independent oversight and reduce conflicts of interest. For everyday investors this matters because board structure affects governance, decisions on fees, investment strategy and the accountability of trustees who manage members’ retirement savings.
How will the planned increase in the super guarantee affect industry funds and members?
A six‑year rise in the super guarantee from 9% to 12% (beginning the year after the article) is expected to underpin inflows into industry funds but also raise the fiduciary bar for the whole sector. More compulsory contributions mean funds manage larger member balances, increasing scrutiny on governance, investment decisions and disclosure to protect members’ interests.
What did the Health Services Union affair reveal about board appointments and removal powers in industry funds?
The HSU affair highlighted that union‑linked appointments can raise governance concerns: Michael Williamson’s position on the First State Super board as a Unions NSW representative led to scrutiny and his resignation. The episode also showed that, under current laws described in the article, industry fund boards do not always have the power to remove directors — raising questions about accountability and board governance.
What are regulators and industry groups doing about disclosure and independent directors?
Regulators such as APRA have taken on new regulatory powers and are seen as favouring stronger board templates from the Cooper review. Industry bodies have moved too: the Financial Services Council announced members would appoint independent chairs and a majority of independent directors and expand disclosure. The Industry Super Network has argued that long‑term performance should be the prime selection criterion for default funds.
What options do industry super funds have to respond to calls for governance reform?
Industry funds can proactively strengthen governance by voluntarily adding more non‑aligned or independent board members, improving disclosure of payments and conflicts, and choosing new directors through existing boards rather than external bodies. The article notes they face a choice: embrace change now to pre‑empt tougher, possibly mandatory standards from the government or risk unilateral reforms if talks stall.
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