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Super charged: How union-aligned industry funds rose to prominence

Wednesday, 20 September 2017

By Fred Pawle:  

An extensive, and expensive, television advertising campaign repeatedly asks Australians to “compare the two” - the rate of return for members of union-aligned industry superannuation funds against the return from those run by private companies. As the advertisements correctly show, the industry super funds invariably perform better for their members.

But “compare the two” in finer detail and you will discover the reasons behind this anomalous result. You will also discover why industry super funds are able to have larger, more expensive boards (often stacked with men from the union movement) than their privately owned competitors, and even occasionally skim off some of their fund members’ retirement savings to finance union activities and businesses.

Put simply, union super funds have an unfair advantage over their private counterparts because they are awarded “default status” in enterprise bargaining agreements and modern awards.

This means that in the EBAs they are locked in as part of the agreement. In some cases, the workers are locked into the fund for the duration of their contracted employment. In the case of MAs, a panel from the Fair Work Commission decides from a list of default status funds.

Further, these workers are often young people who will not draw on their savings for several decades. So not only do the industry funds enjoy large guaranteed flows of contributions, they are free to invest in longer-term or riskier projects, thereby earning greater dividends. Hence, the favourable results when the TV ads “compare the two”.

Finance Minister Kelly O’Dwyer introduced a bill to federal parliament last week that aims to level the playing field. These measures are not only welcome, they are overdue.

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. Yet regulation of the industry does not reflect the size of the industry or the consequences of malfeasance. If our superannuation industry under-performs, all Australians pay through increased reliance on the aged pension.

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.

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.

One egregious example of this is The New Daily, an online news outlet offering its journalism for free in the cut-throat and increasingly unprofitable news industry, which has spent about $12 million of superannuation savings held by Australian Super, Cbus, United Super, First Super, HESTA and LUCRF since it opened for business in 2013. It is now wholly owned by a group called Industry Super Holdings.

The New Daily has an entire section of its site dedicated to promoting industry super funds.

Minister O’Dwyer also proposes to increase transparency of transactions involving members’ retirement 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?

Ironically, industry super funds are champions of independent directors in other organisations, but not necessarily their own. In 2015, the Australian Council of Superannuation Investors, a lobby group that consists mostly of industry super funds representing $450 billion in assets owned by 8 million members, established guidelines to encourage “good governance” in the companies in which they invest.

These guidelines say: “a board should be comprised of the majority of independent non-executive directors who are sufficiently motivated and equipped to fulfil the function of independent scrutiny of the company’s activities”. However, these standards don’t necessarily apply to their own boards. Of the 20 industry funds in ACSI, none has a majority of independent directors. Further, the president of ACSI, Gerard Noonan, is also chairperson of Media Super, which also fails the test of independent directors.

Industry super funds are also being enlisted in, of all things, the gender wars. ACSI has also called for “a target for women to comprise 30 per cent of ASX200 board seats”. To help achieve this, it proposed to “vote against the re‐election of directors in those companies which perform poorly in terms of board gender diversity”.

But, as with the independent directors, some industry super funds fail their own diversity test. TWUSuper, for example, has no female directors despite 62 per cent of fund accounts belonging to women.

And finally, Minister O’Dwyer will allow employees to opt out of the “default status” funds in EBAs so they are not loaded with a new super account each time they start a new job. However, the super industry will not have a properly level playing field until “default status” is removed altogether.

Fred Pawle is the Menzies Research Centre Director of Communications.

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