Letter reveals MTAA's long battle with regulator

years, had been subject to "lurid" allegations by the Australian Prudential Regulation Authority (APRA) and had been issued with a show cause notice.

The 11-page letter, written by Michael Delaney on August 4 last year to the trustee directors, revealed that tensions between APRA and MTAA Super dated back to 2006. "In summary, it shows that the central critical elements of the 2006/7/8/9 and 2010 APRA Review Reports remained unsustained and rebutted by us," the letter stated.

Last month, MTAA hit the headlines with reports that its performance and currency hedging were under APRA investigation.

APRA is yet to make an official statement about the state of play, but the radio silence has left the $1.3 trillion superannuation industry and members of the $5.8 billion MTAA Super Fund confused and angry about the lack of transparency in an industry that manages their retirement savings.

While the MTAA letter to trustee directors is almost 12 months old, it confirms APRA's interest in MTAA dates back to 2006. It also gives an insight into the MTAA's relationship with APRA over that time.

"Ever since the issue of its licence, but principally after its engagement by Mr [John] Rickus [former chairman of MTAA Super] in his interests, the trustee has been bedevilled by APRA. The trustee has sought throughout to have its dealings with APRA be on a co-operative, civil and compliant basis. This has proved not to have succeeded," the letter said.

Indeed, in a Federal Court case in February last year, John Rickus v MTAA Super, the judgment noted that in a prudential review report on November 2, 2004, APRA raised concerns about the trustee's organisational structure and potential for conflicts of interest. It said it had also addressed other corporate governance issues.

Until the global financial crisis, MTAA was one of the highest ranking funds in the country. But big exposures to international property and international infrastructure, and a hedging strategy that cost it hundreds of millions of dollars made it one of the worst ranking balanced funds.

The latest official complete list of Super Ratings returns for July 28, 2010, show that in balanced funds MTAA ranked 48 out of 50 over one year, 49 out of 50 over three years and 43 out of 50 over five years. Over 10 years it ranked 13th.

The letter went on to say the trustee knows absolutely of the correctness and propriety of all its actions in all these engagements. "It is then in the end properly unassailable on the more lurid of APRA's allegations."

And it said "it should be expected that APRA will want to remain in confrontation over the past. Where that can get it is difficult to imagine or see, since the trustee would necessarily have to robustly defend itself at law. The prospects of APRA in that regard are advised to the trustee as remote."

It also reveals some of the issues in contention with APRA - the chairman's salary, the price of the service agreement, the lateness of its rebalancing effort and a show cause notice. "To remind, the trustee has contested this [the show cause notice] most robustly and effectively. I'm advised ... that reflexive measure was thoughtless, against the interests of APRA and its Act and similarly so of the trustee's interests."

A spokesman for MTAA said the letter was almost 12 months old and therefore not contemporary or relevant as most of the matters discussed had been resolved or were being resolved.

He said discussions between APRA and MTAA were confidential so declined to discuss the chairman's salary. He did say the service agreement had been severed on December 31, 2010, and that the actual liquidity of the fund had improved since the global financial crisis.

He also declined to give details on the nature of the show cause notice except to say that it was not about whether the trustee should keep its licence.

But the longer nobody talks, the more destabilising it is to the industry. According to InvestorDaily, at a function last week for the Association of Financial Advisers, the Financial Services and Superannuation Minister, Bill Shorten, got a taste of the angst in the industry when he had to defend MTAA from some unsavoury comparisons to well-known failed financial services firms, declaring such a statement was going too far.

At the conclusion of his response to the question, Mr Shorten said the industry needed to turn its focus away from sectors badmouthing each other and concentrate on the client.

"I'm a bit over one set of funds, be it the retail funds, bagging the industry funds or the corporate funds bagging the industry funds or the industry funds bagging the retail funds and everyone bagging SMSFs [self-managed superannuation funds] and the SMSFs not really bagging anyone just getting on with life," he is reported as saying.

The MTAA fracas has put the spotlight on lack of transparency in super funds and the brewing debate over default funds. In the case of transparency, super funds are not obliged by law to disclose detailed investment outcomes or senior executive and board remuneration, and are not even required to provide members with the full set of audited accounts, unlike public companies.

They also are not required to list when they buy or sell investments, or whether they bought them at market price or sold them at a fire-sale price, or who the buyer was.

With super funds making decisions on the fourth-largest pool of managed money in the world, largely built from compulsory savings, the Gillard government and APRA need to put the spotlight on governance, board composition, conflicts of interest, and the standard of education of board and trustee members.

The issue of default funds also needs to be addressed given Mr Shorten has backed the MySuper default option but is to get the Productivity Commission to examine the way in which default funds are included in awards or enterprise agreements.

Last year, the MTAA Super was signed up as a default fund to a number of awards, bringing the total awards it covers to 10. The MTAA Super is a default fund for the banking, finance and insurance award 2010, general retail industry award 2010, vehicle manufacturing, repair, services and retail award 2010, the wine industry award 2010 and six others.

These awards have broad coverage as the only awards permitted under the Fair Work Act are the modern awards.

An example of coverage can be found in the retail modern award. In terms of the coverage of the General Retail Modern Award, the latest ABS statistics show that 1.2 million Australians work in retail.

This means default funds automatically receive tens of millions of dollars, regardless of their performance. The only way default funds can be added is through the recommendation and agreement of employer groups and unions.

Today another chapter in MTAA will unfold when the Australian Automotive Industry Association, which was launched last year as an alternative to MTAA, relaunches as a federation with all state motoring bodies including the MTAA.

The next chapter promises to

be gripping.