Bert Van Manen (Forde, Liberal Party) Share this | Hansard source

You produced a pretty good budget that is punishing small business, so you have nothing to hang your hat on in that regard.

In 2010 the IPA put a report out, Keeping super safe, and in that they made the comment that some 12 people control approximately $190 billion out of $220 billion in assets in the industry super fund network. It is this web of cross-shareholdings and directorships that would not be tolerated in the retail super fund network. There is also a lack of transparency and information on the investments and their relevant strategies. Industry super funds also make up, interestingly, some 84 per cent of award default funds—a significant and powerful financial position.

This bill before us tonight is about addressing some of the issues raised in the Cooper review. But, again, the focus of this piece of legislation is more directed at the retail super fund market than at holding the directors and shareholders of the industry super fund network accountable. And, as I have just touched on, it does not deal with some of the issues that I have just raised from this report.

But the bill does seek to increase obligations on superannuation fund trustees and directors generally, and more specifically for MySuper trustees. It gives APRA the power to issue prudential standards in relation to prudential matters related to superannuation, and it contains provision for additional statutory duties for trustees of super funds—specifically MySuper trustees, where they must promote the financial interests of beneficiaries' returns in particular. They must assess annually the sufficiency of scale, or so-called scale test, and include in their investment strategy an investment return target and a level of risk for MySuper fund members.

Just these three points in and of their own raise a number of questions. In particular, how is the investment return target set? What is the appropriate level of risk for MySuper fund members? Who is going to determine those? And what are the consequences for the trustees and directors of those MySuper funds that do not achieve those targeted rates of return or exceed the level of risk?

Trustees of registrable superannuation entities must give priority to the interests of beneficiaries where conflicts arise. I think that probably is a much bigger risk in the industry super fund network than in the retail network. An explanatory memorandum makes mention of the fact that trustees must act fairly, but who defines what 'acting fairly' is? They are supposed to exercise the same degree of care, skill and diligence as a prudent superannuation trustee would. Who defines what a 'prudent superannuation trustee' is? They must have regard to valuation information, expected tax consequences and costs of their investment strategies, and offer a range of options sufficient to allow members to choose a diversified asset mix. Well-run funds already do all of these things to maximise the returns for their members. They must have an insurance strategy and meet additional duties in relation to insurance. They must formulate, regularly review and give effect to a risk management strategy, and maintain and manage the financial resources to cover operational risk. These are all sound ideals. The covenants of the default rules for the trustee governance in the super funds are similar to model rules for a company, and they would replace the existing, differently worded covenants contained within the Superannuation Industry (Supervision) Act 1993. It is always worthwhile to support things that are going to simplify regulation and make it easier and clearer for our trustees of super funds or in any manner of business to do their job. Schedule 1 of the bill also sets out a series of new covenants and obligations that will apply to individual directors or corporate trustees and imposes a personal liability on directors by deeming them to be parties to the governing rules of the trust.

Schedule 2 introduces the power of APRA to make prudential standards. As Australia's prudential regulator, APRA already has the power to issue prudential standards in relation to authorised deposit-taking institutions, life insurance companies and general insurance companies but, to date, not superannuation funds. The current powers for APRA do allow it to issue guidance material on expected standards. However, these materials are not legally binding. I think APRA has a reasonable track record over the years, and I think this is a sensible step in giving it this additional power. According to this amendment, the prudential standards will then be determined and drafted by APRA and they will become legislative instruments within the meaning of the Legislative Instruments Act 2003 and will be disallowable by parliament.

The Cooper review into Australia's superannuation system in 2010 recommended that APRA be given these standards-making powers. Additionally, the Cooper review made a range of recommendations relating to governance of superannuation, which has largely been ignored by the government. The recommendations include—and I have probably touched on these already—that disclosure of conflicts should be mandatory, that directors must properly disclose their remuneration in line with provisions that apply for publicly listed companies, that there be appropriate provision for independent directors on superannuation fund boards, and that directors who want to sit on multiple boards must demonstrate to APRA that they do not have any foreseeable conflicts of interest.

The coalition strongly supports genuine attempts to improve corporate governance and transparency for directors and trustees of super funds, as well as improvements and enhancements to prudential standards in superannuation. As has been mentioned in a number of contributions tonight already, superannuation is one of the key pillars that Australians use to accumulate wealth to fund their retirement, so it is important that that money be properly looked after. However, we do not support this bill in its current form, because it imposes a vague annual scale test on superannuation trustees which would be impossible to administer in practice. The coalition has serious concerns about the new scale test provided in this bill, which requires trustees of superannuation funds:

… 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 RSEs …

Who is going to determine what sufficient scale is? Industry experts such as the Financial Services Council have indicated that such an external comparison would be impossible to conduct in practice, as a trustee will not have sufficient knowledge of other registrable superannuation entities to meet this test. The scale test is based on a presumption that larger funds invariably provide lower fees and higher returns to members. There is no evidence to indicate that this presumption is correct in all cases. The scale test, if implemented in its proposed form, could be another potential source of advantage to the larger industry superannuation funds because they already have existing scale, and their ability to gain significant additional scale is then almost enshrined in law. The scale test would create a significant new barrier to entry for new funds by making it more difficult for them to achieve the required scale from the outset, which would lead to a reduction in competition in the superannuation market. It may also lead to further consolidation and mergers of super funds that are driven not by an assessment of the overall best interests of the members but by concerns about meeting this technical and arbitrary test.

Already industry groups have submitted that a better alternative would be an internal test based on a finite list of factors rather than the open-ended and poorly defined external test that the government has proposed. The government should withdraw this provision and embark on a proper consultation process with all participants in the superannuation industry to achieve a more appropriate and more workable outcome than the current flawed proposal. The coalition will move an amendment to remove proposed sections 29VN(b) and 29VN(c) of the bill, which impose the scale test. With MySuper not due to commence until 1 July 2013, we believe the government has ample time to engage in meaningful consultation with the industry if it wants to introduce a more practical test. This would assist in preventing potential negative consequences for members of affected superannuation funds.

In addition to the scale test, we are also concerned about a new provision in the bill which may impose personal liability on directors of superannuation fund boards for meeting the collective obligations of the trustee board by introducing a series of new covenants for directors and deeming individual directors to be parties to the governing rules of the super fund. Section 52 of the Superannuation Industry (Supervision) Act 1993 imposes a series of statutory obligations or covenants on trustees of regulated super funds. These covenants or obligations are exercised by the board of directors or the trustees, acting in a collective manner. This bill proposes to replace existing section 52 with a new section containing enhanced statutory covenants that will be imposed on all regulated super fund trustees, including MySuper trustees. The bill also contains a new section 52A which extends the covenants to individual directors of super funds. There is no equivalent provision in the current SI(S) Act. The new section would make individual directors personally liable for any breach of covenants by deeming them to be parties to the governing rules of the fund. The coalition strongly support enhancing and clarifying the law relating to the obligations of super fund trustees and directors. We also support introducing provisions that clearly deal with conflicts of interests of directors of super funds and ensure that, at all times, directors of super funds put the interests of fund members ahead of any other interests, including their own personal interest. However, there are some strong concerns about the mechanism that the government has used to attempt to achieve this. The bill attempts to introduce covenants that are imported into governing rules of every single super fund and then tries to bind directors to these covenants by deeming each director a party to the governing rules of the fund.

The provisions of section 52A appear to reverse the longstanding convention that boards of directors are jointly or collectively liable for decisions made by the board, including a trustee board, and that the directors are only personally liable if they breach their directors' duties, including their duty to act with reasonable care and diligence at all times. The provisions are so broadly drafted they may not provide certainty for directors who are trying to faithfully execute their duties that they are complying with the law.

In conclusion, the coalition will closely monitor the impact of these new obligations on directors of super funds when they come into force and will act to address any issues that may arise. The government continues to ignore many of the sensible and important corporate governance recommendations of the Cooper review because the government continues to put the interests of its mates in the union dominated funds ahead of those of Australians in the superannuation system. (Time expired)

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