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Industry-run superannuation funds in dire need of better oversight

Monday, 11 December 2017

Industry-run superannuation funds in dire need of better oversight
MRC's Policy Director Spiro Premetis

Spiro Premetis writes in The Daily Telegraph:

THE retirement savings of Australian workers are being used in a campaign to prolong poor standards of governance in the superannuation industry, and to support the Labor Party’s attack on banks.

How much have the super funds siphoned off in order to pay for this campaign?

They won’t say.

The “fox in the henhouse” advertisement is not the most sophisticated ad on TV, with its cheap lighting effects and clichéd, Hitchcock-like soundtrack.

But what it lacks in technique it makes up for in ubiquity.

For eight months, the ad has ­attempted to frighten Australian television viewers into believing their nest eggs were being stalked by cunning thieves from the big end of town, who were lobbying the government to make a raid in the dead of night.

In fact, Australian workers should be more concerned about the standards of governance of the current guardians in the industry super funds (but more of this later) rather than a perceived skulk of banker foxes.

Asked by the Senate Committee on Economics in October how much the industry super funds had spent on the campaign, Industry Super Australia director of public affairs Matthew Linden said he would take it on notice.

In a subsequent letter to the committee, Mr Linden said: “ISA expenditure on specific consumer advertising sought by members of the committee and specific performance metrics related to their success are understandably commercial in confidence.”

We disagree. The five million members of the funds who make up the ISA have a right to know how much is being spent on a dubious attempt to influence policy and bolster the Labor Party.

Australian workers should be more concerned about the standards of governance of the current guardians in the industry super funds.

Legislation that required super funds to be more transparent about the way that they spent members’ funds, such as on advertising campaigns, was pulled from Parliament this week.

Ironically, after intense lobbying of crossbenchers from unionists, the legislation was withdrawn.

Worse still, in the process of crab-walking away from this legislation, the Senate crossbench stalled sensible reforms to get independent directors on superannuation fund boards with the skills and expertise, and instead insisted on leaving union hacks overseeing a large proportion of Australians’ retirement savings.

Australia’s superannuation industry has grown from $136 billion when the compulsory contribution was introduced to more than $2 trillion today. In many families, superannuation is now a bigger asset than the family home.

Senators from the Nick Xenophon Party and One Nation were heavied, and failed to stand up to the bully tactics. One can only imagine the influence that unions and groups like ISA will have under a Shorten Labor government.

Voters across the nation should have the right to question whose interests these senators are representing, apart from their own, by failing to support these reforms.

Given such resistance and obfuscation, Minister for Revenue and Financial Services Kelly O’Dwyer is right to note that: “The ferocity of the campaign waged against these basic transparency and accountability measures goes to show there is something to hide.”

These comparisons also hide the risk you are taking on to achieve those returns. Risk has its rewards, but risk these higher rewards come at a price when the market turns.

Union-backed industry funds have taken on more risk in the good times — boosting their returns. But this will not always be the case.

Without effective governance and transparency around dealings, superannuation fund boards have the scope to amplify rather than reduce the risks to members money.

Unions, the Labor Party and the ISA have claimed this debate is ideological. Nothing could be further from the truth.

Australia’s superannuation industry has grown from $136 billion when the compulsory contribution was introduced to more than $2 trillion today. In many families, superannuation is now a bigger asset than the family home.

Two major independent reviews (the Financial System Inquiry in 2014 and the Cooper Review of the Governance, Efficiency, Structure and Operation of Australia’s Superannuation System in 2010) both concluded that greater independence was needed on superannuation trustee boards.

It is time the regulation of the industry reflects the size of the industry or the consequences of malfeasance.

If our superannuation industry underperforms, all Australians pay through increased reliance on the aged pension.

So let’s recap. What was the government seeking to do?

The key measure is independent directors. Curr­ently, the figure is only 6.9 per cent across the industry. The potential for conflicts of interest are currently high.

When a director is a representative of a union, for example, he (union-affiliated directors on super boards are almost always male) will occasionally be placed in a position where his ­loyalty to the union is in conflict to his responsibility to his members.

Two major independent reviews (the Financial System Inquiry in 2014 and the Cooper Review of the Governance, Efficiency, Structure and Operation of Australia’s Superannuation System in 2010) both concluded that greater independence was needed on superannuation trustee boards.

O’Dwyer, as Financial Services Minister, also proposed to increase transparency of transactions involving members’ funds.

Two independent reviews have said there should be more transparency of transactions involving members’ funds.

This transparency would shine a light on, for example, the $1 million TWUSuper recently paid to the TWU, which recorded the transactions as “other receipts”.

Another measure in the minister’s bill is annual general meetings of super funds. This would offer members the opportunity to also question possible misuse of their retirement savings.

It might also give members of some funds the opportunity to ask why they are paying so many board members. Cbus’s trustee board has 18 directors, none of whom is independent. Of the 39 super fund boards with more than eight directors, only one is a retail fund.

Research by the Menzies Research Centre has found no causal relationship between board size and performance; in other words, signing up more than the average number of directors seems to provide no benefit to members.

If these funds can’t even manage their own board size and expenses, how can they be trusted to manage contracts worth millions in dollars in fees to consumers?

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