Shorten push leaves industry super funds between rock and hard place

The superannuation fund movement scored a victory in 2010, but the tide is turning.

The superannuation fund movement scored a victory in 2010, but the tide is turning.

THE union-backed industry superannuation fund movement scored a tactical victory in December 2010 when Financial Services Minister 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 the way the industry funds are structured.

In 2010 the government gave the green light to 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 the 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.

However, longer-term statistics still favour the not-for-profit funds (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 past 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 one 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 not-for-profit funds there have only been two comprehensive interventions and board restructurings, of Host Plus Super in 2003, and MTAA Super last year.

But the climate has changed since Shorten gave short shrift to Cooper's board-restructuring proposal in 2010.

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 super industry. The financial regulator, APRA, 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 may 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's possible that if talks don't 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.

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