Super governance

Should superannuation funds be subject to the same governance requirements as companies they invest in? Three industry figures share their views.

Although superannuation funds are similar to public companies, they are responsible to a third party, so the nature of a trustees’ fiduciary duty to their members means their duty of care is higher. It is a relevant question whether their governance arrangements should be different, even though they experience a separation between ownership (fund members) and control (the trustee), similar to companies they invest in.

Listed entities are subject to various ASX Corporate Governance Council guidelines and some can be adapted for superannuation. While some superannuation fund trustees are corporations, many of these standards could not be adopted by trustees without modification because the trustee’s duty of care is owed to members of the fund.

Superannuation trustee boards have higher governance responsibilities because of the obligation to act in the best interests of members, as required under trust law and codified in legislation. This includes members’ long-term interests as ultimately the trustee must meet their retirement goals.

This higher level of duty also arises from the compulsory nature of superannuation. Fund members generally have less control over trustee boards and fund members rely on trustee boards to deliver optimal retirement outcomes. At the Association of Super Funds Australia 2014 conference, Peter Costello said the super industry must evolve and lift its governance standards, given the size of the superannuation pool has surpassed the banking industry in funds under management. The perception that superannuation is a “cottage” industry ignores the reality that superannuation funds have higher governance standards.

Amendments to the Superannuation Industry (Supervision) Act, together with the APRA prudential standards for superannuation (2013), have significantly raised the level of skill, care and diligence required of trustee directors. These duties, laws and regulations dictate that the primary purpose of the trustee of a super fund is to hold and invest the assets of fund members to secure and maximise their retirement savings. This fiduciary role adds a dimension that should be recognised.

- Pauline Vamos, CEO, Association of Super Funds Australia

The National Reform Summit – attended by both the Australian Institute of Company Directors chief executive officer John Brogden and myself – reflected the importance of business groups and society working together to ensure Australia is in good shape for future generations. Superannuation will be a key part of that future because it delivers incomes to retirees and is a driver of growth.

The summit faced home truths:

• By 2055 nearly half of the population will not have a “comfortable” retirement without a speedy recalibration of superannuation tax breaks and the age pension across the income scale.
•  We need an innovative response to the impending challenge of a shrinking workforce and a generation heading into retirement. Infrastructure investment will be a central driver of increased productivity, a pre-condition to maintain and enhance living standards. Clearly, Australia’s $2 trillion super funds are ready to turbo-charge economic and productivity growth.

These are national priorities and a unified sense of purpose is essential. Industry super funds, jointly governed by employer groups and trade unions, are an enduring example of how collaboration delivers better outcomes than conflict. Regrettably, rather than focus on the big picture, industry super’s commercial competitors – the banks – have waged a campaign to transform superannuation and industry funds. Their objective is to change regulations to suit their vertically integrated business models.

They have argued that more “independent” directors would improve the governance of industry super funds. The campaign ignores that industry funds are deliberately different in their structure, character and culture and in their motivation. These deliberate differences have delivered tangible returns to members in the form of superior investment returns and have meant industry super has been immune to the financial scandals plaguing other financial institutions, notably the banks. There is now an opportunity for industry super funds to work collaboratively with the company director community to promote best-practice governance.

- David Whiteley, CEO, Industry Super Australia

It’s difficult to argue against the principle that important institutions such as superannuation funds should operate according to the highest internationally recognised standards of governance. Principles of good governance have world-wide acceptance and are essentially the same for a listed company as they are for a private business, not-for-profit organisation or public sector entity. Indeed, the ASX Corporate Governance Council’s guidelines are based on these principles and are often used voluntarily by major charities that recognise the importance of robust governance.

It is not unreasonable to expect that superannuation funds would consider the substance of the ASX Corporate Governance Council’s recommendations as suitable for their operations. They were involved in their development and remain vocal proponents of their use. Circuitous debate about the need for independent trustee directors on superannuation boards places too much emphasis on the past returns of funds as a litmus test for good governance. Good governance survives markets, good and bad.

The performance of an entity – either share price gains for a listed company or investment returns for a super fund – is not the only test of whether its governance is effective. This is too simplistic.

Good governance instead provides for the long-term stability, sustainability and profitability of an entity. For super funds, it should give investors the confidence that their assets are not just safely managed but will generate a steady, reliable income stream when they retire. Good governance and the ASX Corporate Governance Council’s guidelines, importantly, apply on an “if not, why not” basis that gives boards the flexibility to adopt accepted standards in a manner that best suits their needs.

The oversight and transparency of our superannuation funds has improved in recent times. The challenge is to maintain the momentum so the governance of our retirement schemes is subject to the same process of continuous improvement that applies to the well-run boards of other organisations, including ASX-listed companies. Australians have too much to lose otherwise.

- Gemma Morgan, Senior Policy Advisor, AICD