Super funds must be forced into the open

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.

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.

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