The shock collapse of the $10 billion merger of two of the country's oldest super funds, Equipsuper and Vision Super, a month before they were due to vote to complete the deal is another example of the archaic governance standards in the $1.3 trillion superannuation industry.
The decision to scupper the merger will be a blow to the federal government's efforts to force consolidation of smaller super funds to cut administration costs and lift member returns. It is also a blow to members of both funds, particularly Vision Super, as the bulk of its assets are in a defined benefit fund that has come under pressure as members retire.
Equipsuper made the call on Friday after three years of intensive negotiations. That it took so long to walk away epitomises some serious problems in Australia's super system. It also sheds some light on why so few mergers have been consummated and why most mergers take longer than a typical merger discussion, when they should be quicker given they only require board approval.
The chairman of Equipsuper, Andrew Fairley, cited a series of factors for the decision, including Vision Super board's failure to provide essential information, a failure to meet dates and for breaching and continuously seeking to change several parts of the memorandum of understanding and the shareholders' deed.
But at the heart of the problem was an inability to agree on which trustees from both boards would form the newly-merged board. Put simply, industry fund boards are made up of an equal number of union-backed trustees and employer-backed trustees, so each representative organisation wants to keep its ratio of spots.
In the case of Equipsuper, one of the few democratically-elected industry fund boards, this wasn't such a big issue, but it was for Vision Super, which has four representatives from the Australian Services Union and four from employer groups including the Victorian Employers Chamber of Commerce and Industry, the Victorian Water Industry Association and the Municipal Association of Victoria.
Fairley said getting all organisations on the Vision Super board to agree on the representation on the merged entity was a major roadblock. He said this was one reason why the discussions took three years and almost failed a year ago.
Last May, Vision Super's union-backed trustees demanded the new board abandon democratic elections and guarantee union-nominated positions. It threatened to pull the deal until the Australian Prudential Regulation Authority was forced to intervene.
While the federal government has made some inroads into cleaning up governance issues in the super industry, it has refused to address the composition of boards, arguably to keep the unions on side. But it is a fundamental issue that needs to be addressed as most industry funds' trustees are appointed to the boards in equal numbers by unions and employer groups and cannot be sacked, no matter how incompetent.
Jeremy Cooper, in his review into superannuation in 2010, addressed the issue and recommended industry fund boards be restructured so a third of directors were independent, a third union reps and a third employer reps.
The failed merger of Equipsuper and Vision Super shows that as long as this structure remains in place, industry fund consolidation will be held back by vested interests.
If the failed merger isn't example enough why change is required, the federal government should consider the shenanigans going on at the Energy Industries Superannuation Scheme, which recently raised eyebrows when Bernie Riordan, a former trustee of EISS and chairman of FuturePlus until April and NSW secretary of the Electrical Trades Union until March, decided to write to members of the union in March, asking them to lobby against a potential tie up of EISS with State Super and First State.
The EISS became shrouded in controversy when APRA raised concerns over structural changes and executive departures at its administration arm, FuturePlus. The Audit Office of NSW said in an audit opinion of EISS published last year that the fund might have to provide funding to FuturePlus to remain compliant and that trustees might have to consider a merger of the super fund to ensure an efficient structure.
The fund's arrangements also triggered a lawsuit last year, when the state secretary of the ETU, Dean Mighell, lodged a statement of claim in the Federal Court seeking the repayment of $1.8 million from Riordan. The lawsuit centred on the fees Riordan collected as a director of the EISS, FuturePlus and another subsidiary, Chifley Financial Services. The claim was withdrawn in February and curiously, a month later, Riordan was appointed a commissioner of Fair Work Australia.
Since the introduction of Fair Work, super funds have been written into industrial awards. This means retail funds find it almost impossible to get default fund status. Not so for industry funds.
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.