Superannuation time for a change AICD Review

  • Date:01 Aug 2005
  • Type:CompanyDirectorMagazine
The superannuation industry has tremendous economic clout, yet the trustees making major decisions do not always have the necessary skill-sets, says John Simmonds*

Superannuation - time for a change

The superannuation industry has tremendous economic clout, yet the trustees making major decisions do not always have the necessary skill-sets, says John Simmonds*

Super funds support the retirement dreams of the nation. They also own a significant share of Australia's largest businesses, build our shopping malls and offices and extend our influence in overseas investment markets. The impact of the industry is immense.

Influence comes with responsibility though and it is the guardians of our super funds, the trustees, who manage this enormous wealth on our behalf.

Our trustees have served us well in the past but they are facing new challenges. Will they continue to serve us well in the future? The industry's regulator, APRA, is determined that they should and is intervening to force new standards upon them.

The challenge of change

The super industry is in a period of unprecedented change. "Choice" legislation has caught the headlines recently and heralds a new era in competition between funds.

In addition, the new compliance regime being imposed by APRA is setting higher governance standards. Each board of trustees must obtain a licence from APRA to continue operating as a trustee. Any trustee operating without a licence after June 2006 will face a substantial fine or even a custodial sentence.

It may seem incomprehensible that trustees, the custodians of a large slice of our national wealth (it is a $600 billion industry), are generally volunteers. They receive relatively little remuneration (sometimes none at all) and no professional qualification is demanded of them.

Under the circumstances, most have done a remarkable job on behalf of their members. The principles of trust law under which they operate simply require that the trustee act in the beneficiary's interests and with appropriate skill and judgment. This requirement is reinforced in legislation governing super funds, specifically the Superannuation Industry (Supervision) Act 1993.

One licensing requirement takes that basic duty further and goes under the heading "Fit and Proper". Its objective is to ensure that each individual trustee can demonstrate personal integrity and each group of trustees demonstrates collective competence.

APRA's aims under Fit and Proper are difficult to argue against. First, they are targeting a small minority of unscrupulous trustees who set out to exploit super funds for their own personal gain. Second, they want to improve the skills and experience of trustees.

Targeting fraud

While it is difficult to beat a determined fraudster, APRA is intent on spotting them. APRA is placing a responsibility on funds to ensure the integrity of each individual trustee.

To do this, funds will need to put in place a comprehensive set of procedures relating to the appointment and removal of trustees. They must also make sure that existing trustees continue to meet acceptable standards.

On a basic level, each trustee will be subject to a police check. Individuals with a criminal history, particularly fraud or a breach of duty as a director of a company will be disqualified from acting as a trustee. Also, bankrupts, those with a civil penalty order against them or anyone else disqualified under the Corporations Act will not be able to act as a trustee.

Most funds will ask trustees to attest to their personal integrity at outset and then on a regular basis thereafter. They will also seek reassurance about conflicts of interest and have plans in place to identify and deal with conflicts as they arise. In particular, any relationships with a "related party' will need to be disclosed. Super funds are generally compact entities that outsource many of their key activities, including administration and investment management. APRA is particularly concerned that funds avoid (or properly manage) a conflict situation where a trustee has a commercial relationship with a service supplier.

Emerging conflicts

Under the new choice rules, funds are competing directly for members. A trustee who acts for more than one fund is therefore arguably conflicted.

In fact, one of the major issues for any trustee is how to balance fiduciary responsibilities with commercial reality. For example, are an existing fund member's interests best served when a trustee invests money on marketing in the pursuit of new members? Most trustees have concluded that they are. This is on the basis that more members means lower fees (as the costs of managing the fund is distributed more widely).

So trustees and funds are competing with one another and the market intelligence, insight and experience gained by a trustee on one board may be directly benefiting a competitor.

This conflict is paid relatively little attention by APRA though, probably because of a supply and demand issue. There is strong demand for high quality, experienced trustees but the supply is short. While no experience is necessary, a trustee board does need certain skills and a working knowledge of super fund governance to function. There are relatively few people with the right experience in the marketplace. This is where APRA's concept of collective competence fits and will help to address the shortage over time.

Collective competence

Running a super fund is like running any business. It demands a diverse set of skills, some peculiar to the industry, others generic like finance and accounting.

The difference between the board of a regular company and a board of a super fund is that trustees are rarely professionals working full time in the super industry. Most have a "day job" on top of their trustee duties.

Trustees do not need to be experts in superannuation but the deeper their understanding of the issues, the better they can serve their members. That is obvious. APRA also recognises that it is difficult for one trustee to grasp all the issues. So, trustee boards need to demonstrate their collective competence. `This collective competence should extend as widely as possible. It should cover key areas such as an understanding of the basic structure of super funds, investment, taxation, insurance, administration etc.

Again the process for the appointment of trustees is important. Trustees need to analyse their collective capabilities and recognise when and where shortfalls in experience exist. Those gaps can then be plugged by the recruitment of external experts or by developing the skills of the existing trustees. The way that trustees are recruited is a potential barrier to progress. Members are entitled to select half of the trustees that manage their fund. How can a group of trustees encourage the members to select someone with the skills the board needs? In reality this is difficult and some boards end up imbalanced.

Even if they have the skills they need among their number, APRA is keen that trustees don't rest on their laurels. They should continue to develop and refine their skills.

The starting point is a simple competency framework that accounts for individual and collective expertise. By plotting all the trustees on a scale of competence against the key areas of expertise needed, it is possible to recognise both individual and collective learning needs. APRA then expects those learning needs to flow through to a development plan for individual trustees and for training to be completed and recorded.

Trustee boards have improved governance standards in recent years. Most understand that independence, competence and integrity are all essential. They also recognise that the funds that embrace compliance as a driver of business excellence are likely to succeed. Stepping up to meet APRA's requirements might be time consuming and painful but most trustees recognise the need. For members, the value may ultimately be counted in the standard of living they enjoy in retirement.

John Simmonds is client director, Superannuation Assurance and Advisory Services


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