Murky world of super funds needs transparency

AS THE country's $1.3 trillion superannuation industry descended on Canberra on Tuesday night to celebrate 20 years of compulsory super, the elephant in the room was the impending release of draft regulation to reform super based on a draft report from an industry panel headed by Paul Costello.

The draft regulation will include what form MySuper, the default superannuation option first suggested by Jeremy Cooper in his review, will take. It will also make some recommendations aimed at addressing the poor transparency, inadequate disclosure and low level of corporate governance that is all too common among most super funds.

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 the Australian Prudential Regulation Authority need to get some backbone and do something about the level of governance, board composition, conflicts of interest, and the standard of education and suitability of board and trustee members.

The decision in 1991 to set up a superannuation guarantee scheme to force Australians to save for their retirement was far sighted. It lifted the level of retirement funds from an initial $126 billion to $1.3 trillion, leaving the country in far better shape than its European and US counterparts.

But two decades on, our super system is out of date and in desperate need of reform not a nip-and-tuck type but a radical overhaul.

Super funds are not obliged by law to disclose detailed investment outcomes or the salaries of senior executives or the board. Nor are they required to provide members with a full set of audited accounts. And when it comes to buying and selling assets, they are not required to disclose whether they bought assets at market price or sold them at a fire-sale price, or who the buyer was.

And, in most cases, members don't have control over the people who manage their money. As a rule, members do not elect the managers or trustees. This means they can't replace them duds or otherwise.

This has created a perception that the boards of industry funds are retirement homes for both business leaders and union officials.

And while the Costello report to Treasury is welcomed, it hasn't been allowed to go near enough to addressing the problems of transparency and disclosure in the industry.

Dean Mighell, Victorian secretary of the Electrical Trades Union (ETU), raised the issue of transparency in his decision to take legal action against the national secretary of the ETU, 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 last month, 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, whatever the case, members have a right to know the truth.

Indeed, a press release from MTAA Super's new chairman, the former premier of Victoria John Brumby, speaks volumes about how backward the industry really is.

The release, issued last week, said it wanted to improve the transparency, accountability and governance of the $5.8 billion fund. To this end it said it would start releasing the biographies of all directors, the date of appointment and the organisation each director represents, a log of their attendance at board meetings, full audited accounts, and the remuneration of the board and the top five executives by bands.

A listed company would be de-listed from the ASX if it had operated with such a dearth of information.

But lack of disclosure and transparency are not the only issues that need to change. The default fund process is fraught with conflicts and flaws.

Since the introduction of Fair Work, super funds are written into industrial awards. This means retail funds find it almost impossible to get default fund status.

Indeed, of all 122 modern awards, only one retail fund, AMP, has managed to get default fund status and only then because it was grandfathered into them and it includes relatively obscure awards such as the Seagoing Industry Award.

The Cooper Review tried to rectify this by recommending the Productivity Commission review the process by which default funds are nominated into the awards.

Cooper also recommended that a new mandatory default product structure for the default segment of MySuper be "able to be nominated, for default fund purposes in awards approved by Fair Work Australia".

Despite pressing on with developing MySuper, the government has not yet set a date for the Productivity Commission to undertake this review. Indeed, it excluded it from the Costello review. This means that when MySuper is introduced, it will be subject to the current cosy default fund process, where retail funds are essentially locked out.

MTAA Super is a glaring example of the flaws in the default system and why it needs to change. Last year, when it was being investigated by APRA and after it was ranked the worst-performing balanced fund, MTAA Super was signed up as a default fund to a number of industrial awards covering millions of workers in banking, finance and insurance, and in the general retail industry.

The country's compulsory super industry was born in the 20th century. It has a lot to be proud of in terms of helping Australians amass so much personal wealth. But in the interests of its owners, vested interests should take a back seat and let the industry live and thrive in the 21st century.