Number is up for shoddy fund governance

It has been quite a journey for Shorten and the Gillard government as both have their roots in the industrial relations movement and are thus perceived as being soft on reforms that weaken the powerful relationship between unions and industry funds, with many union officials sitting on the boards as trustees.

In a low-key statement released to the online trade magazine I&T News, published on day two of the parliamentary joint committee on corporations and financial services, Shorten said he wanted to put before the Parliament legislation to improve corporate governance this year.

That perception of softness to the union movement deepened when the Cooper review was released in late 2010 and Shorten opted to bury, defer or ignore most of the recommendations that would strengthen corporate governance, lift transparency and change the composition of the boards of super funds.

It then turned into a political issue when the government commissioned Paul Costello to look into a Stronger Super reform package but the consultative committee was not allowed to touch on key governance issues such as transparency regarding how much trustees are paid or the composition of super boards, as they were excluded from the terms of reference.

But with some scandals erupting in the past 18 months, the heat was on for change in a sector that is supposed to be the guardian of the retirement savings of Australians.

The need for change intensified with revelations that the $6 billion MTAA Super fund is being investigated by the Australian Prudential Regulation Authority (APRA) as well as a payroll tax investigation into the MTAA motoring trade organisation and the legal action against the national secretary of the Electrical Trades Union, Bernie Riordan, over fees he allegedly earned while serving on four boards connected with members' superannuation 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 highlight the need for better transparency among a number of super funds.

The brutal reality is Shorten and the Gillard government did not have much choice but to make public statements on corporate governance. It became an imperative when the financial services regulator APRA and the corporate regulator, the Australian Securities & Investments Commission, started to flex their muscles on the issue of governance.

Shorten is now trying to go on the front foot with his statement that he wants director fees disclosed, along with a better handling of related party transactions and greater trustee board diversity. "The current super fund governance is inadequate and lags banking, insurance and listed companies," he said. His office reaffirmed these comments. With super funds making decisions on the fourth-largest pool of managed money in the world, largely built from compulsory savings, the bulb is starting to go off in people's heads that the present murky system cannot continue.

Few super funds release details of how much they pay directors because they do not have to. Indeed, some super funds do not even bother to inform members who the directors are, how long they have been on the board, how many times they attend board meetings, or give details of their background. They are not required to provide members with the full set of audited accounts, unlike public companies, and they are not required to list when they buy or sell investments, whether they bought them at market price or sold them at a fire-sale price, or who the buyer was.

In most cases trustees are appointed to the boards of industry funds and cannot be sacked no matter how incompetent the board might be, and if a super fund decides to merge with another, it does not have to get permission to do so from its members. This means members have no control over whether their fund is being merged with a fund with an inferior portfolio of assets.

Consolidation is a ticking bomb for members as the pace accelerates with the introduction of MySuper. In the past decade the number of industry funds has fallen from 165 to 65.

As funds continue to consolidate over the next few years and asset bases expand, there will be a heavier concentration of retirement savings being controlled by fewer financial managers and trustees. It is time to bring the industry into line with the banking sector instead of being seen as a retirement home for some clapped-out union officials.