Paul Fletcher (Bradfield, Liberal Party) Share this | Link to this | Hansard source

I rise to speak about Local Government Super, a topic about which I have had things to say previously. This is a fund which invests over $5 billion of the retirement savings of approximately 90,000 local government employees in New South Wales. Its performance has not been particularly impressive. Chant West, the respected ratings firm, ranked the LGSS Balanced Growth Fund 51st out of 62, with a return of minus 0.9 per cent for the year to 30 June 2012.

I have previously raised LG Super as exemplifying the problems with the so-called equal representation model, under which half of the directors of the fund are appointed by employer representatives and half by member representatives—in practice, unions. The Cooper review has found that the equal representation model is flawed as unions do not necessarily represent all employees, and employer associations do not necessarily represent all employers. Sadly, the relevant minister, the Minister for Financial Services and Superannuation, the member for Maribyrnong, has refused to implement the recommendation for much-needed change in this area.

If one examines the investment and commercial decisions of LG Super, concerns are only intensified. In 2004 LG Super purchased a company, Local Government Financial Services, or LGFS, from the Local Government and Shires Association, or LGSA. LGFS is a company that provides financial advice to local councils. It is also an authorised deposit-taking institution for councils in NSW. LG Super and the LGSA had several directors in common. The question must be asked, whose interests were served when LGFS was purchased by LG Super? It certainly benefited LGSA, which received funds from the sale of an asset. But was the purchase of this company in the best interests of members of LG Super? Section 62 of the Superannuation Industry Supervision Act provides that directors must ensure that funds are maintained solely for the purpose of providing benefits to members of the fund on their retirement and for certain ancillary purposes.

The conduct of LGFS since the purchase raises serious questions about the judgement exercised by directors of LG Super in the decision to purchase. Its activities have created a serious financial problem as well as being found to be unlawful, as is clear from a Federal Court judgement handed down recently. This was the result of LGFS being sued by councils for its selling of $16 million of complex financial instruments known as 'Rembrandt notes' to 15 NSW councils between 2006 and 2007. The value of these notes crashed following the global financial crisis, resulting in councils losing 90 per cent of their investments.

Justice Jagot found in her judgement that LGFS    made numerous misrepresentations to councils about the notes and their suitability for councils, breached its Australian financial services licence in selling the notes to councils because they were not a debenture and thus not a security in which LGFS was licensed to deal, and engaged in the publication of information or a statement false in a material particular. This was not only a financial problem for councils, it was also a problem for LGFS itself and LG Super because there were $26 million worth of notes that were not onsold but were held on LGFS's balance sheet. These were eventually sold at a loss to LGFS's parent, LG Super.

One can only ask: what is a vehicle owned by a superannuation fund doing engaging in this type of activity? While I am asking questions about investment decisions by LG Super, let me ask another question. Is it true that LG Super invested almost $1 million with a film production company called Wild Candy Pty Ltd, under an agreement signed in 2007? Is it true that this investment was subsequently written off? Is it true that the project being funded was for a work comprising music to be performed by an orchestra and played with pre-recorded films about wild pandas, whales and a 'carnival of the animals'? If this is true, it would be interesting to know how such an investment is consistent with the sole purpose test. It would be interesting to know how such an investment is consistent with the job of the board and management of LG Super of maximising the retirement incomes of New South Wales local councils. If this is true, it would raise the question of why they thought it was appropriate to invest in the film industry, which is known to be a very risky industry. So the investment decisions in a range of areas by Local Government Super, including in Local Government Financial Services, raise serious questions.