Chris Ketter (Queensland, Australian Labor Party) Share this | Link to this | Hansard source

Tonight I rise to express my deep concern with this government's jaundiced approach to the treatment of industry superannuation funds. At the outset, I put on the record that I have been a director—in fact, an alternate director—of an industry superannuation fund, and I have had the opportunity to see firsthand how industry superannuation funds work at the highest level. That experience has left me a huge fan of industry superannuation funds. We know:

They are ‘run only to benefit members’

They are governed by trustee boards specifically representing employees and employers—typically these trustees are appointed by both the ACTU and/or unions and employer associations. A two-thirds majority is necessary for all decisions

They do not pay sales commissions to financial planners

They have sound investment strategies, which include long-term investment in Australian infrastructure

These differentiating factors have contributed to the impressive and competitive performance of industry super funds over the long term

This is consistently backed up by superannuation industry ratings agencies. If all of those things are true, why is it that we have a government which seems to be determined to meddle with a system that is performing so well?

The latest incarnation of this government's attack on the industry superannuation fund system is the Superannuation Legislation Amendment (Trustee Governance) Bill 2015. This bill amends the Superannuation Industry (Supervision) Act 1993 to require trustees of registrable superannuation entities to have a minimum of one-third independent directors and an independent chair on their boards. This sounds innocuous, but there are many other reasons that this bill should not be supported.

Firstly, I point out that there is no evidence that the proposed changes will improve member outcomes. Ultimately, an improvement for members must be the paramount objective of any change to our current governance arrangements. Moreover, I would like to remind those opposite that new governance regulations were introduced just 18 months ago, in mid-2013. These require all funds to regularly evaluate the effectiveness of their board and directors using an independent third party. Even though, according to APRA, the 2013 changes are not yet fully implemented, the government is already seeking to turn the industry on its head again.

There is no clear evidence that the representative trustee model of governance is broken or that the proposed model for increased numbers of independent directors will improve member outcomes. Rather, it is a fact that the vast majority of industry super funds are outperforming their retail counterparts. The McKell Institute's investigation into governance structures concluded that the representative governance model 'promotes higher levels of diversity among trustees, more effectively minimises conflicts of interest and, importantly, has continually outperformed the for-profit model over the past decade'. The current arrangements, I repeat, have generated higher net returns for fund members. So why are we meddling with something that is working well?

The increased role that will be required for APRA in approving and oversighting super fund board members can only be seen as excessive regulation and an increase in red tape, which is quite at odds with the government's stated purpose of reducing red tape. There is no doubt that these changes will inevitably increase the administrative costs of managing super funds through increased red tape, reporting and remuneration requirements associated with intensive oversight of the selection of board members. Minimising the administrative costs of managing funds must be a key consideration. There is no doubt that this change will lead to increased costs which will be passed on to members. For a government that claims it is all about serving the interests of individuals, how can it justify a new rule where the only certain outcome is that it will increase the costs of fund management? Given that there is no evidence indicating how the proposed changes will improve the performance of the funds, I can only conclude that this bill is simply an attack on funds which have representative boards, irrespective of their performance.

We have had two comprehensive reviews of this sector within the past few years—the Super System Review under the previous government and the Financial System Inquiry under the current government. This bill is not consistent with either of these independent reviews. The Cooper inquiry recommended the adoption of a qualified equal representation model in the not-for-profit sector and the introduction of different governance arrangements for retail funds. For the retail funds, there is a need to address the perceived problem between the fund members and the dominant profit-seeking parent companies.

The available academic evidence shows a clear causal relationship between not-for-profit representative governance funds and higher levels of returns for members. But this bill seeks to dramatically change the governance structures of the funds that are performing well. The Productivity Commission concluded that there was no compelling evidence to support one model of governance over another, and recommended against prescribing any particular structure for superannuation fund boards. Even more alarming is the possibility that this one-size-fits-all model of governance could undermine the performance of the better performing funds by forcing the appointment of independent directors who may not necessarily be as skilled as the people they are replacing. It has been claimed that the appointment of independent directors will bring more skills and a diversity of views to the boards of these funds. However, the academic evidence indicates that greater diversity seems to be more strongly associated with the equal representation model, where, for example, representation on boards is likely to combine both employer groups and employee representatives.

One particular international study, undertaken in 2007, links good governance to pension fund returns but it does not mention independence as a criterion for successful performance. In fact, this research, undertaken by Ambachtsheer, exemplifies the Ontario Teachers' Pension Plan as a model of good governance, noting that its board is appointed by its sponsors, the government of Ontario and the Ontario Teachers' Federation. The research concluded that the example of the Ontario Teachers' Pension Plan was an optimal board composition in securing relevant skill sets, positive behavioural characteristics and a passion of the organisation and its participants. The evidence indicates that for-profit funds tend to appoint their so-called independent directors from internal sources. A majority of directors on retail fund boards are employed by the fund itself or by the fund's service provider, with only a smaller proportion of directors representing other defined interest groups.

Examination of the CVs of the nominally independent directors on the large bank owned super funds shows that more than half are finance industry insiders, with careers linked to institutions involved in the sale of financial services. How does this so-called 'independence' deliver better outcomes? Why should we assume that a class of professionals—so-called independent directors—many of whom sit on the boards of a large number of funds and attract substantial remuneration for their services, will deliver a better service than people who are deeply and passionately committed to serving their organisation and colleagues? We are all too familiar with the many failings of the banking and wealth-management industries, failings which have not been prevented by their independent boards.

My final point is that this bill does not address the governance challenges in super. It will alter the governance of funds irrespective of their current performance. Our high-performing industry funds, operating under the current representative model, are expected to change their governance system to a prescribed model of independent directors, which already operates in the for-profit sector. For-profit funds, with their so-called independent boards, are giving their members a poorer deal. Is the government so embarrassed by the superior performance of the industry funds and their representative boards that it wishes to bring them down to the poorer levels demonstrated by their private sector counterparts? There is not a single argument that can be made to support this bill.

I put to you that if this bill goes through it will open a Pandora's box of regulation, administration and oversight that will raise the costs of fund management and transfer the profits that belong to ordinary Australians into the pockets of a group of professionals, so-called independent financial advisers who, rather than being driven by a passion and a commitment to the members they serve, are driven by the remuneration they can accumulate by sitting on many different boards.