It's time for a super shake-up

AS THE regulator of the country's $1.4 trillion superannuation industry closed off submissions into a proposals paper designed to reform the industry's antiquated governance and capital adequacy standards, Australians were bracing for a 2 per cent loss in their super funds for 2011.

Returns and corporate governance have a symbiotic relationship and in the past few years the spotlight has been on both.

In the case of governance, the deadline for submissions was late last week, and the various submissions epitomise the debate between those desperately trying to cling to the status quo and those who realise that the sector - and the people who run it - must move into the 21st century.

It is a debate that continues to rage inside the government, particularly after the Cooper review recognised the need for more disclosure on remuneration and the need for a more independent board, but the Gillard government's response was to bury them.

But with super funds making decisions on the fourth-largest pool of managed money in the world, largely built from compulsory savings, the Australian Prudential Regulation Authority (APRA) decided to get tough

on best practice for the industry because superannuation is too important to ignore.

To this end, APRA in September issued a discussion paper outlining 12 prudential standards designed to do something about the level of governance, board composition, conflicts of interest, and the standard of education and suitability of board and trustee members. It gave the industry a deadline of December 23 to make submissions.

It also proposes to beef up the risk side of the industry. At present super funds are required to set aside a flat $5 million in operational risk reserves to be used to compensate members in the event of administrative errors such as unit mispricing - irrespective of the fund's size. So a fund such as Australian Super, which has $40 billion in funds under management, is required to hold only $5 million in risk reserves. The figure was set in 1993 when the industry was worth $126 billion and super funds were a fraction of their current size.

In the proposals, APRA did not posit a minimum percentage of funds under management as an operational risk reserve, but noted in the discussion paper that other industries were required to set aside 0.25 per cent of funds under management.

If all goes to plan, APRA's beefed-up powers in 2012 will throw light on a sector that has been operating for years like a cottage industry and bring it more into line with the regulatory standards required of the banking and insurance sectors.

Some of the submissions have been breathtaking in their self-serving arguments and inability to understand the importance of lifting the level of corporate governance.

The lobby group for industry super fund trustees, the Australian Institute of Superannuation Trustees (AIST), lodged a submission this month that argued industry superannuation funds do not need independent chairmen and should not have to disclose the salaries of top executives. It argued that pay packages of senior executives should be disclosed in $50,000 bands and rejected APRA's call for boards to be subjected to an independent and objective performance assessment every year.

The disclosure by motor industry fund MTAA Super of remuneration in bands of $75,000 for 2011 is a good example of why this doesn't work. Given the fund had three chairmen in the past year as well as some other executive changes, the $75,000 bands revealed that four directors or executives received between zero and $75,000 and another seven received between $75,000 and $150,000. This information gives little indication of who got paid what. If anything, it is misleading and confusing.

In another submission, the Financial Services Council - which represents Australia's retail and wholesale funds management businesses, superannuation funds, life insurers and financial advisory networks, which are responsible for investing $1.8 trillion on behalf of more than 11 million Australians - supports APRA's push for more disclosure on trustee remuneration. Indeed, the FSC believes disclosure should be brought into line with the standard of disclosure required of ASX-listed companies. The FSC also supports more independence on super boards, including an independent chairman.

There is little doubt our super system is out of date and in desperate need of reform. APRA has gone further than the government in its proposals, but at the end of the day they are guidelines and how far it will push them is anybody's guess. If it wimps out, come the next federal election, the Coalition has made it clear it won't press the issue.

The role of trustees has come under increasing scrutiny following the collapse of fund manager Trio Capital and the poor investment performance of MTAA Super - which APRA is still examining in addition to conducting a payroll tax investigation - and the legal action against Electrical Trades Union national secretary Bernie Riordan over $1.8 million in fees he allegedly earned while serving on four boards connected with members' super funds.

In a statement of claim lodged with the Federal Court in July, it was alleged that Riordan, starting in 1998, collected $1.8 million in fees from sitting on the boards of the Energy Industries Superannuation Scheme, FuturePlus, Chifley Financial Services and MERT. The claims have been rejected but it highlights the lack of transparency with several super funds that needs to be remedied

aferguson@fairfaxmedia.com.au