Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Hansard source

The Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012 represents a number of proposed legislative changes flowing from the government's response to the super system review, commonly known as the Cooper review. In particular, this bill is focused on changes to the governance of superannuation funds and gives the power to APRA to make prudential standards for superannuation. These are important matters. The superannuation industry, in large part, owes its success to government policy. The industry is boosted by the compulsory nature of superannuation contributions, which are currently at nine per cent, and the concessional tax treatment afforded savings in a superannuation fund.

Super funds under management now amount to $1.3 trillion, broadly the annual size of the output of the Australian economy. Superannuation savings are a key form of private sector saving. For many individuals, their funds in superannuation accounts would almost be their only significant savings other than the family home. The increasing size of the superannuation industry and its critical importance as a savings vehicle mean that good governance is of paramount importance to financial stability and to household confidence. It is also of critical importance that the superannuation industry be soundly supervised by an appropriate regulator. The government needs to protect the interests of superannuants just as it needs to protect the interests of depositors in authorised deposit-taking institutions—obviously without the same explicit guarantees for funds under management.

Schedule 1 provides for additional statutory obligations for trustees. These covenants become the default rules for trustee governance and superannuation, and replace existing covenants in the Superannuation Industry (Supervision) Act. For the most part, these seem pretty worthwhile. They are the sorts of duties that trustees should already be performing, but it certainly does not hurt to define these responsibilities more carefully. MySuper trustees must promote the financial interests of beneficiaries, with particular focus on the returns that are earned. The trustees must annually assess sufficiency of scale of the MySuper product. That is known as its scale test. The trustees must include in their investment strategy an investment return target over 10 years as well as the level of risk for the MySuper product.

There are also obligations for trustees of registrable superannuation entities. These trustees must, among other things, give priority to the interests of beneficiaries where conflicts arise. They must exercise the same degree of care, skill and diligence as a prudent superannuation trustee. They must have regard to valuation information, the expected tax consequences and costs in their investment strategies and they must offer a range of options sufficient to allow members to choose a diversified asset mix. They must have an insurance strategy and must meet additional duties in relation to insurance. They must formulate, regularly review and give effect to a risk management strategy. And they must maintain and manage financial resources to cover operational risk.

Again, many of these requirements are in no way contentious and these duties are really what trustees of registrable superannuation entities should already be doing. The existing covenants that apply to self-managed superannuation funds will continue to apply under the changes and the peak industry body, the Self-Managed Super Fund Professionals Association of Australia, SPAA, sees little or no implications from this legislation.

Schedule 2 of the bill deals with prudential standards for superannuation funds. It gives APRA the power to determine those standards. The standards will be legislative instruments within the meaning of the Legislative Instruments Act 2003 and will be disallowable by parliament. APRA currently has the power to issue prudential standards in relation to authorised deposit-taking institutions, life insurance companies and general insurance companies, but not for superannuation funds. Currently, APRA can issue guidance material on expected standards for superannuation funds, but these materials are not legally binding. The Cooper review recommended APRA be given a standards-making power in relation to superannuation. Bringing superannuation funds within the prudential net of APRA is a good idea and one which will enhance the protections for superannuants.

The coalition has two issues with this bill. The Cooper review into Australia's superannuation system handed down its report in June 2010. It recommended a large range of initiatives in relation to the governance of superannuation. These included: first, that the disclosure of conflicts of interest be mandatory; second, that directors must properly disclose their remuneration in line with the provisions that apply for publicly listed companies; third, that there should be appropriate provision for independent directors on superannuation fund boards; and, fourth, that directors who want to sit on multiple boards must demonstrate to APRA that they do not have any foreseeable conflicts of interest. Unfortunately this bill does not address any of these fundamental issues. This is a wasted opportunity. There is still much work to be done to elevate the corporate governance of superannuation to an acceptable level.

The second issue concerns the 'scale test' for MySuper funds in the new subsection 29VN(b) and (c). This requires trustees to determine on an annual basis that there is sufficient scale, in terms of assets and beneficiaries, such as to not disadvantage the financial interests of beneficiaries relative to the financial interests of beneficiaries in MySuper products in other funds. The explanatory memorandum notes that where a trustee determines that its scale is insufficient, the trustee will be required to take appropriate action to rectify the insufficiency so they continue to meet their general obligation to promote the financial interests of beneficiaries. APRA will provide prudential guidance on processes trustees could adopt to rectify insufficient scale.

The scale test is based on a presumption that larger funds invariably provide lower fees and higher returns for members. However, there is no evidence to indicate that this presumption is correct in practice. Indeed, it may be the case that smaller funds will be more nimble and better able to quickly exploit market opportunities. In this way they may offer returns superior to those offered by larger less flexible funds. At best this provision of the bill seems redundant and an unnecessary intrusion into the workings of the market.

The scale test may also confer an advantage on the larger industry superannuation funds because they have existing scale. In this sense it may operate as a barrier to entry for new funds. This would reduce competition in superannuation. This concern is shared by many of the stakeholders. As part of the Parliamentary Joint Committee on Corporations and Financial Services inquiry into this bill, a public hearing was held on 2 March 2012. The union controlled Industry Super Network said of the scale test:

We agree that is problematic.

Given that the government takes its instructions from trade unions you would think they would listen to this. The Association of Superannuation Funds of Australia stated:

We believe the current wording of the scale test is problematic.

They further stated that it should be removed. Mercer, a fund with around $16 billion of funds under management and 230,000 Australian clients, commented:

… the scale test is not needed if the trustees have that responsibility to act in the member's best interest.

See this speech in context