As the regulator of the country's $1.4 trillion superannuation industry closed off submissions into a proposals paper designed to reform its 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. 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 that is raging between those desperately trying to cling to the status quo and those realising the sector - and the people who run it - has to move into the 21st century.
It is a debate that continues to rage inside the government, particularly after the Cooper review addressed the need for more disclosure on remuneration and the need for a more independent board, but the federal 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 decided to get tough when it comes to best practice for the industry because it is too important to ignore.
To this end, APRA issued a discussion paper in September 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. Right now, 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. This figure was set in 1993, when the industry was worth $126 billion and super funds were a fraction of their present 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. This means that funds such as Australian Super, which have $40 billion in funds under management, are required to hold only $5 million.
If all goes according to plan, APRA's beefed-up powers in 2012 will throw light on a sector that has been operating like a cottage industry for years 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, 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 MTAA's disclosure of remuneration in bands of $75,000 for 2011 is a good example of why this does not 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 and if anything 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 that are responsible for investing $1.8 trillion on behalf of more than 11 million people, supports APRA's push for more disclosure on trustee remuneration.
Indeed, the council believes disclosure should be brought into line with the standard of disclosure required of ASX-listed companies. The council 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 pushes them is anybody's guess. If the government wimps out, come the next federal election, the Coalition has made it clear it won't.
The reason is simple: the role of trustees have come under increasing scrutiny following the collapse of the fund manager Trio Capital and the poor investment performance of the motor industry fund MTAA Super, which is still under investigation by APRA as well as a payroll tax investigation, and the legal action against the national secretary of the Electrical Trades Union, Bernie Riordan, over $1.8 million in 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 lack of transparency among a number of super funds that needs to be addressed.
Frequently Asked Questions about this Article…
What are APRA's proposed changes to superannuation governance and why do they matter for investors?
The Australian Prudential Regulation Authority (APRA) issued a discussion paper outlining 12 prudential standards aimed at lifting superannuation governance. The proposals target board composition, conflicts of interest, the education and suitability of trustees and board members, and stronger risk controls. For everyday investors, stronger governance matters because better-run boards and clearer rules can reduce mistakes, improve oversight of investments, and increase transparency about how your retirement savings are managed.
How would changes to operational risk reserves affect super funds and members?
APRA highlighted that super funds still hold a flat $5 million operational risk reserve (set in 1993) to cover administrative errors, regardless of fund size. The discussion paper noted other industries use a percentage (for example 0.25%) of funds under management. If APRA moves toward a size-based reserve, large funds would likely need bigger buffers, which could improve member protection against mispricing or administrative failures.
What is the debate over remuneration disclosure for super fund trustees and executives?
There is a push for greater remuneration disclosure so members can see what trustees and senior executives are paid. The Cooper review recommended more disclosure, but some industry lobby groups (for example the Australian Institute of Superannuation Trustees in its submission) argued for disclosure in broad pay bands rather than exact figures. Other groups like the Financial Services Council want disclosure aligned with ASX-listed company standards. Clearer pay reporting helps members judge conflicts of interest and board performance.
Why is board independence and annual performance assessment being discussed for super funds?
APRA proposed that super fund boards have more independence—such as independent chairmen—and be subject to independent, objective annual performance reviews. Proponents say independent boards reduce conflicts of interest and improve decision-making. Some industry submissions resisted these proposals, but supporters argue independence increases trustee accountability and protects members' interests.
How have scandals like Trio Capital and MTAA Super influenced calls for stronger superannuation rules?
High-profile problems — the collapse of fund manager Trio Capital and poor investment performance and investigations into MTAA Super — have intensified scrutiny of trustees and governance. These events, along with legal claims over fees (for example allegations involving Bernie Riordan), underline the need for better transparency, oversight and controls in the super sector, according to the article.
When could APRA’s tightened powers and new standards take effect?
APRA signalled stronger powers and standards in its discussion paper and the article notes those beefed-up powers were expected to come into play in 2012. However, the ultimate timing and strength of any new rules depend on how regulators and the government progress the proposals.
If the government doesn't adopt APRA's full proposals, what might happen next?
The article suggests uncertainty: the federal government had previously downplayed some Cooper review recommendations, while political opponents signalled they would push for tougher rules. If the government resists stronger reforms, further regulatory pressure or political change (for example at an election) could still result in tougher governance and disclosure requirements for super funds.
As a member of a super fund, what practical steps can I take given these governance and transparency issues?
Look for clear information from your fund about trustee remuneration, board composition (including whether there is an independent chair), and how the fund handles operational risk. Check annual reports and disclosures, compare funds on transparency and performance, and raise questions with your fund if details are vague. Greater member scrutiny and demand for disclosure are exactly what regulators and industry groups are debating in the proposals described in the article.
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