Bruce Billson (Dunkley, Liberal Party, Shadow Minister for Small Business, Competition Policy and Consumer Affairs) Share this | Link to this | Hansard source

I move:

(1) Schedule 1, item 9, page 6 (lines 1 to 20), omit paragraphs 29VN(b) and (c).

[obligations of trustee]

This amendment was foreshadowed by my friend and colleague the shadow Treasurer and member for North Sydney, I reflect on the fact that a key issue raised by the coalition in the second reading debate was not addressed adequately in the minister's summation. I am hopeful that he may be able to provide some small insight into the government's thinking.

Our amendment relates to the scale test for MySuper funds that is contained in new sections 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 not to disadvantage the financial interests of beneficiaries relative to the financial interests of beneficiaries in MySuper products held and operated by other funds. Just to explain our thinking here, an otherwise perfectly acceptable fund that satisfies all of APRA's requirements in terms of prudential standards— its governance, its investment performance, its commitment to the best interests of beneficiaries, its fees and its returns—must now pass an additional scale test in order to be an acceptable provider of a MySuper product where they can be authorised by APRA to be one of the default funds that the minister talked about.

Essentially what is happening here in the opposition's view is that the government is seeking to legislate to provide for an unsubstantiated presumption that, when it comes to super, bigger is best. This is the only policy rationale that seems to be driving the government's actions—that somehow bigger is best and that, invariably, larger funds provide for lower fees and higher returns. Sadly, there is no evidence to substantiate that assumption, yet that presumption is now being legislated in what the government is providing. So here we have a presumption, with no basis of evidence, being injected into this framework.

It is clear that a number of smaller funds, as the shadow Treasurer outlined, can be more nimble and better able to exploit market opportunities and in this way actually provide returns superior to those that are offered by larger, less flexible and less agile funds. At best, we think this provision seems redundant because the minister outlined all of the new requirements and touched on the best interests of members and how those are enshrined and then the prudential framework that APRA would be putting in place. But now there is this additional test, a scale test. We are concerned that that may confer an advantage on larger industry superannuation funds that is simply not substantiated and not justified by the facts and that these larger funds simply get a head start because they are large, not reflecting on any of the performance criteria or governance or prudential requirements that the minister spent a few moments talking about. We are concerned that this would have an adverse impact on competition and would represent a new, unjustified barrier to new entrants, and interestingly the coalition is not alone. It should come as no surprise to the minister that these are concerns shared right across the sector by stakeholders.

The minister spoke about being prepared to work with people of goodwill to further develop this framework, yet clearly he has not been listening to the input he has been getting, and in fact this input should come as no surprise. It was input that was provided when there was draft legislation prepared and it is input that has been reflected in the parliamentary joint committee. Even the union-controlled Industry Super Network commented, 'We agree that the scale test is problematic.' We then saw the Association of Superannuation Funds of Australia concur with that view: 'We believe the current wording of the scale test is problematic.' They urge that the scale test be reviewed. Mercer, one of the larger funds, which might have thought it would be advantaged by this, itself identified that 'the scale test is not needed if the trustees have the responsibility to act in the member's best interest'. If all of the safeguards that the minister alluded to are to have any value and utility at all, the scale test becomes completely redundant. The Financial Services Council identified that the scale test should not be in the law. It said:

Not only is it a barrier to entry but the test, as suggested in the current drafting, is very subjective, very open.

There is nobody we can find who actually thinks this scale test adds anything whatsoever.

Mr Shorten interjecting—

Sorry, I stand corrected. The minister put his hand up and said there is one person who thinks it is a good idea: it is the minister. We are blessed that he has such wisdom and foresight to share when everyone else active in the sector—all those people he urges to be consulted—do not think so. So we think this is redundant and should be removed. (Time expired)

Bill Shorten (Maribyrnong, Australian Labor Party, Minister for Financial Services and Superannuation) Share this | Link to this | Hansard source

I thank the member for Dunkley for his contribution, but I want to reassure him that, by having a test about scale, we do not assume that big is automatically best. I also want to assure him that small, well-performing funds will be able to demonstrate that size is not impeding their performance. So I hope that puts some of his concerns to rest.

I also heard him say that he felt that the government was not listening to the contribution of those opposite. When we talk about scale and the problems that they say there are with scale, I might go to what the member for Bradfield specifically said:

Secondly, the scale test, which is one of the centrepieces of this reform, does not make good sense in economic logic or day-to-day practice.

He said it was a bad idea. He has also unfairly accused me of being slow to act on the Cooper review, when in fact that is not the case. We responded to the Cooper review in December 2010, within a few—

Mr Billson interjecting—

No, the member for Bradfield mentioned that. Thank you, Member for Dunkley. He said that we had failed to respond comprehensively to the Cooper review. Let me say that the scale test is a classic example of detail contradicting the rhetoric of those opposite. In the Cooper review it was recommendation 1.6(b). So the Cooper review, which the government has been accused of not following, explicitly called for the scale test. In fact, I wonder if some of those opposite have even read the full Cooper review.

They also showed this lack of attention to detail when they argued that the opt-in arrangement in our financial reforms was an industry fund plot. I think it is fair to say of the contemporary opposition that, whereas they can no longer find any reds under the beds and are still looking for the Greens under the beds, they are certainly convinced that industry funds are under the beds engaging in some sort of takeover of Australia, which is unfair. I think the attack on industry funds is also terribly unfair to many of the trustee directors who serve on industry funds. I would point out that Peter Collins, former Liberal leader in New South Wales, is a director of an industry. fund. I think that when those opposite attack industry funds—be it in the bilious attack by the member for Mackellar or the comments of the member for Dunkley, or indeed others—they are attacking a lot of hardworking employer reps, union reps and, indeed, former leaders of the Liberal Party. I for one do not believe that the people who serve on industry funds with the equal representation model are cat's paws for one point of view or another. I believe that they are motivated to serve in the best interests of their members.

There have also been concerns in terms of this scale proposition that somehow, by requiring trustees to consider scale, this will cause unforeseen and inappropriate outcomes. We believe that talking about scale does not mean that it will be necessary for funds to make detailed comparisons of performance against every other fund. Certainly many funds will be able to determine very quickly that scale is not an issue for them. Also, we have said in this bill that we will send a signal to smaller, poorly performing funds that they need to actively and regularly consider whether scale is an issue. APRA will consult with industry on processes that trustees could adopt to form a determination about scale and relative considerations for trustees in rectifying insufficient scale.

I think it is about time that this parliament tried to be constructive and work on the issues we agree on. If the opposition, but for this issue of scale, would support the rest of the matters and is willing to put itself into that difficult ground, I am interested to see whether, if it cannot win its amendment on scale, it will oppose improvements to the governance of superannuation funds and trustees.

Bruce Billson (Dunkley, Liberal Party, Shadow Minister for Small Business, Competition Policy and Consumer Affairs) Share this | Link to this | Hansard source

It was curious that the minister failed to directly address the points that we were making in support of our amendment. I suspect he might have had pre-prepared remarks that went to a bit of a slap-around of the opposition, which seems to be his combative nature. But he failed to turn his mind in any way to the points that were raised in support of our amendment. He did say that APRA would give some guidance to poorly performing smaller funds. I would hope that, as he has suggested elsewhere, APRA would give guidance to poorly performing funds full stop. The issue about whether the fund is performing well or not should stand in its own right. The issue about its size is being introduced as another variable. As he launched into attacks on me for comments relating to industry super funds, none of which were actually made in my contribution—which was a curious line of attack—I was actually pointing out that the Association of Superannuation Funds was actually supporting—

Bill Shorten (Maribyrnong, Australian Labor Party, Minister for Financial Services and Superannuation) Share this | Link to this | Hansard source

Far be it from me to attribute something to the member for Dunkley which was not in his contribution. I was confusing his contribution with the other four contributions. I withdraw that.

Bruce Billson (Dunkley, Liberal Party, Shadow Minister for Small Business, Competition Policy and Consumer Affairs) Share this | Link to this | Hansard source

A gracious moment, Sir. The point I was making was that the union controlled industry superannuation network actually concurred with the coalition's view that there are problems with the scale test. We have been listening to stakeholders. All the stakeholders that have come forward and made a submission see no great utility and, in fact, some risks with a scale test which seems to belie all the other measures in the bill relating to proper governance, the best interests of members, the returns for the fund and the level of fees. All of a sudden all the things that are performance related in the bill run into this idea that size is a fundamental determinant of whether a fund product should be authorised as a default fund under MySuper.

I again urge the minister to turn his mind to the chorus of concern about this particular issue and the direct input that has been provided through the inquiry process around his draft legislation, all of which points to the simple fact that this scale test is problematic, confusing and redundant. It is an uncharted area where there is inadequate guidance and it seems to displace the very purpose behind some of the amendments that the minister spoke strongly in favour of which go to the performance of the funds: the prudential standards, the best interests of those participating in the funds, and fees and returns. That should be what really matters. That is about performance and outcomes for members' money and the scale contribution adds nothing whatsoever.

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

I am pleased to rise to make a contribution as we consider in detail the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012 and, in particular, the amendment moved by the opposition to remove the specific provisions that give effect to the scale test, which we on this side of the House think is ill considered.

There is no dispute from this side of the House with the central proposition that what we all ought to be concerned about is the optimal and efficient operation of superannuation funds and making sure that trustees and others charged with the operation and management of superannuation funds do so in a conscientious and effective way. We on this side of the House have difficulty with the issue that the relevant provision—proposed section 29VN—would have the effect of baking into the law of the land an assumption which we consider is contentious and not well made out—that is, the assumption that bigger is always better when it comes to the size of a superannuation fund. The minister told the House earlier that there was no assumption that bigger is somehow better behind this new provision. If there is no such presumption it is very simple: take the provision out—because, by putting into black-letter law an obligation upon trustees to consider the scale of the fund every year, what you are doing is imposing upon them the obligation to consider the merits of the proposition that a bigger fund is better. If that is not a proven, well-made-out assumption—if finance theory, among other things, does not provide a good basis for that assumption—then you should not be legislating on the basis of that assumption.

That brings up the obvious question: why is the government legislating on the basis of this assumption? What are the merits behind this idea? Why is it reflected in this piece of legislation that the House is considering today? It is very instructive that the Australian Institute of Superannuation Trustees, which represents all superannuation trustees including trustees operating in industry funds as well as every other kind of superannuation fund, had this to say to the Parliamentary Joint Committee on Corporations and Financial Services:

While accepting that scale may provide benefits to members, AIST confirms the position we put before the Committee. That is, the pursuit of optimal net returns to members having regard to risk considerations and the safe stewardship of members’ benefits should [be] the overwhelming obligation upon trustees of MySuper products, and this obligation should not be clouded, diminished or distracted by other considerations including scale.

The body which speaks for trustees of superannuation funds is saying that as a matter of black-letter law, drafting and policy it is a bad idea to put into law a formal obligation upon trustees of superannuation funds to give consideration specifically to the question of scale.

Of course superannuation trustees must always have regard to delivering the best outcomes for members of the fund—that is not in contention. What is in contention before the House today is whether it is good policy and good law to impose a specific obligation upon superannuation trustees to have regard, on an annual basis, to the matter of scale. On this side of the House we say that is a bad idea. That is not a good element of this piece of legislation and that is why we are moving this amendment. There is a host of good policy reasons to argue against it, and if I have time in another contribution I will make some broader observations, but I want make very clear this specific point: we do not contest that superannuation trustees have an obligation to fund members. Of course they do. What we contest is the legislative drafting stratagem of putting this specific duty in the bill. We say that is a bad idea.

Bill Shorten (Maribyrnong, Australian Labor Party, Minister for Financial Services and Superannuation) Share this | Link to this | Hansard source

I appreciate the attention that the member for Bradfield pays to the topic of superannuation, but I cannot agree with some of the assertions he made and I feel compelled to set the record straight.

It has been put by him and others that there is no support for a scale test. I challenged that when I said, 'What about the Cooper review's explicit recommendation?' We know the number, don't we, Mr Fletcher? Recommendation 1.6(b) explicitly says that a scale test is a good idea. How is it that those opposite can say that we have not followed the Cooper review enough? Yet when it comes to the test, when there is a specific measure in the Cooper review, which we are implementing, the opposition is strangely struck silent. But it was not just the Cooper review that found that a scale is central to a trustee optimising performance for members; it was the Costello report. Again, the Costello report had input from a whole lot of people from all points of the compass in terms of superannuation policy in Australia and they supported the scale test.

Certainly industry said that they wanted to be reassured as to how the test would operate in practice. That is why APRA has made it clear that it will consult and provide guidance. So we do need to make clear to all those trustees who are being made nervous by some of the assertions of those opposite that APRA will consult about the practical implementation of scale. Furthermore, the policy behind the scale requirement in the legislation is that it sends an important signal to small, poor-performing funds that they need to actively and regularly consider scale as an issue. The member for Dunkley said that somehow small poor-performing funds were receiving more attention than poor-performing funds generally. That is not right. One issue that may need to be considered with respect to small poor-performing funds is their size.

Where a fund conclude that scale is a factor in their poor performance, APRA will be able to ask trustees how they intend to continue to promote the best financial interests of their MySuper members. This may result, for example, in trustees having to proactively seek merger opportunities. My concern is that if those opposite were successful with their amendment, saying that trustees of small funds do not need to consider the context of scale—whether or not having a small fund adds to greater operating costs—then giving people a leave pass on that question sends a signal to funds that they do not have to worry about this matter at all.

Furthermore, we believe APRA would find it difficult to explicitly pursue scale issues through either prudential standards or general supervision of funds if there were a decision to remove the scale requirement from the legislation. That is why we do not support removing the scale test.

If the opposition think that a requirement for funds to look at scale is so important and if they are unsuccessful on that amendment, will they turn their back on better governance in superannuation funds because of one proposition for which there is legitimate, steep support for and interest in the government's position? We await with interest.

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

I think we should focus very carefully on what the minister has just said, because it reveals the fundamental flaw in logic which underpins proposed section 29VN, which the opposition's amendment proposes to remove from the bill. What the minister said to the House just now is that this provision sends a clear signal to small poor-performing funds. Note very carefully the way he put together two different concepts: small and poor performing. If you listen to the minister, you hear that 'small' and 'poor performing' are effectively the same thing. But of course they are not. The difficulty with what the minister proposes and the difficulty with the bill, which the minister has brought into the House, is that this provision will not just send a signal to small poor-performing funds; it will send a signal to all small funds—well-performing small funds and poor-performing small funds. The policy problem with that is that a consequence of this provision is that funds which are small and which perform well may end up finding themselves pushed into a course of action which, arguably, is not in the interests of fund members. It is hard to avoid noting the kind of language which is used in the explanatory memorandum, in paragraph 1.27, where the author refers to the obligation on trustees:

… to rectify the insufficiency so they continue to meet their general obligation to promote the financial interests of beneficiaries.

If you are putting a provision into legislation, if you are making it part of the black-letter law of this country and if you are imposing formal legal obligations on trustees with all the consequences that go with that, you need to be sure that the policy basis for imposing that obligation is a good one. We have heard no argument from the minister as to why the policy basis for imposing this obligation is a good one. We heard from the minister that the scale test is a good idea because the Cooper review says it is a good idea. There is much in the Cooper review which contains merit, but it is surely not appropriate for this House of Representatives—the people's house—to abdicate its function of bringing to bear an independent judgment, an independent exercise of weighing up the merits and the disadvantages of pieces of legislation which are brought to the House. That, in effect, is what the minister is asking us to do this morning, because he is arguing: 'The scale test is a good idea because the Cooper review says it's a good idea.'

I do not find that argument persuasive. I believe that our obligation in the House of Representatives is to consider the merits of the idea. Let us just remind ourselves of the idea which is embodied in this provision, which the opposition's amendment seeks to remove. The idea is that bigger is better. The idea is that scale in superannuation funds is a good thing. If that were not the underpinning idea, this provision would not be here. The reason the opposition object to baking this in to black-letter law is that that idea is deeply contentious.

There are advantages to scale but there are also advantages to being small and nimble. Smaller investment funds can take advantage of investment opportunities which are not available to very large funds. Smaller funds have the capacity to invest, for example, in small companies which may produce better returns. However, it is a well-known problem in investment management that very big funds are, in practical terms, precluded from investing in small companies because the minimum size of investment they need to make for it to make a difference to their members is so big that it is impractical for them to take a stake of that size in a small company. So there are good arguments in economic theory and policy as to why scale is not an unmitigated advantage, and that is why we say the idea underpinning this provision is a bad one.

Bill Shorten (Maribyrnong, Australian Labor Party, Minister for Financial Services and Superannuation) Share this | Link to this | Hansard source

Sometimes in this place the opposition twist what the government says and you let it go through to the keeper because that is their DNA. But in this case I cannot allow that to be so. I accept that the member for Bradfield was not here to hear my second reading speech so he may be unaware that I made it very clear that small funds are not automatically worse than big funds. Indeed, in response to the contribution from the member for Dunkley, I made it very clear and I used the term 'small, well-performing funds'. We will be able to demonstrate that size is not impeding them. But despite the verballing by the opposition and the incorrect portrayal of what the government said in the speech, what I also know to be the case is that the Cooper review, which was an independent review—far more independent than the Liberal member for Bradfield—came to the conclusion that scale can be a factor in operating costs and economies of scale do exist. That is not to say that small funds should not be present in the market. I accept that small funds do provide some of the opportunities the member for Bradfield enunciated. What I do not accept is that we can simply dismiss this review and say, 'We're the people's house and we do not have to follow an independent review because it is being conducted.' That is true. That is very true.

What I also know to be the case is that it was put by members opposite that somehow the government is going in a different direction from what the industry believes. Clearly the Cooper review, which represents a lot of points of view in the industry, did have a distinct view which is in alignment with the government. Therefore, when we talk about the government acting on its own, that is not correct. People say that, if you have a requirement for trustees to periodically consider scale, that is somehow an assault on small funds. That is not correct. It is put to us that we say big funds are better than small funds. That is not what the government has said. What we do recognise is that we have an obligation to constantly and relentlessly seek the cheapest possible costs in the administration of superannuation and exert downward pressure on the fees and charges. I also note that, despite the reservations expressed by those opposite, I have not yet heard their position. Do they regard this requirement to consider scale as sufficiently important that, if they are unsuccessful in that amendment, they will turn their backs on the rest of the propositions on trustee governance? I sincerely hope not.

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

There is a curious logical contradiction in what the minister is saying to the House this morning. He has just told us that the government do not say big is better than small. Well, if you do not say that, do not put a provision to that effect into the legislation. It is very simple. Let us be clear. Trustees of superannuation funds have an extremely comprehensive and extensive range of duties. There can be no question that superannuation fund trustees today have extensive legal duties to act in the best interests of members of the fund. The proposition from the minister that what we need to do on this specific point is buttress the existing law by adding in a specific obligation to consider scale is one that we should therefore test very carefully. We should only expand upon the existing black letter law duties of trustees of superannuation funds if a very good case is made out for that change.

When you look at the merits of the argument, it is clear that scale has pros and cons. Yet we have an amendment put by the government, a provision in the bill, which assumes that scale is an absolute good. It asks the trustees of small funds to consider each year whether they are big enough and, if not, to consider whether they should merge. The policy case for that has not been made out. But it is clear that there is one segment of the industry whose interests are very well served by such an amendment, and that is the existing larger funds, particularly the larger industry funds. If you are in charge of, for example, the $43 billion Australian Super, this probably looks like a great idea. If you are the Industry Super Network, representing a range of industry funds including a number of the very large funds, this probably looks a good idea.

But I can tell you that' if an argument of this kind were being made in other industries, you can only imagine the howls of protest that would result. If it were put to the House that there should be a duty every year on the directors of Virgin to determine whether their company was as big as Qantas and, if it was not, to change its business structure accordingly, you can only imagine the howls of protest. If there were a duty imposed every year upon the directors of Bendigo Bank to ask whether their company was as big as Westpac and, if it was not, to pursue a change in business structure accordingly, you can only imagine the howls of protest. And looking at the industry from which I came before I came into the parliament, the telecommunications industry, if it were put into the legislation that there was a duty every year on the directors of AAPT, Primus, Internode and iiNet to ask themselves whether they are as big as Telstra and, if they were not, to pursue a change in their business structure, you can only imagine the howls of protest. You can only imagine the arguments which would be put saying this is a change to the law which suits the interest of the big end of town and the case has not been made out on policy grounds. But that is exactly the position we are in when it comes to this provision of this bill which the government is seeking to have this House pass. This is a bill which suits the interests of the big end of town in the superannuation industry, and that is not a good thing when the policy case for what is being proposed has not been made out. We have nowhere heard from the minister, from the government, a convincing policy case as to why scale is an absolute good. That is why on this side of the House we have moved an amendment which would remove these contentious provisions from the bill. We would remove the contentious proposed section 29VN because it is based on an underlying policy idea the case for which has not been made out. When the peak body representing superannuation trustees has expressly put the view that it is misconceived and it is based on an improper prioritisation of the objectives which ought to be motivating superannuation trustees, then we on this side of the House have very profound reservations and it is those reservations which underpin the amendment we have put.

Bob Katter (Kennedy, Independent) Share this | Link to this | Hansard source

In addressing this matter I want to say that I fully realise that the intentions of the Minister for Financial Services and Superannuation are good and we very much admire work done by the minister in many areas. But in this area I have a lot of specialist trainers in my electorate, particularly in the field of the first Australians and in the field of rural activities, and we have a very big organisation called RITE that works out of Charters Towers and is probably the leading trainer of people going onto cattle stations in Australia. But, of course, what is most relevant to us is the 40,000 jobs and I can serve notice here that neither the ALP nor the LNP are going to be flying workers in from overseas. Those 40,000 jobs will belong to Australians. Addressing the actual amendment that has come before us—

Bill Shorten (Maribyrnong, Australian Labor Party, Minister for Financial Services and Superannuation) Share this | Link to this | Hansard source

Mr Deputy Speaker, on a point of order, this is a debate about superannuation trustees. I am not sure if Mr Katter is referring to this or another bill.

Kelvin Thomson (Wills, Australian Labor Party) Share this | Link to this | Hansard source

The minister is correct, the House is debating an amendment moved by the member for Dunkley to omit two paragraphs from the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill.

Bob Katter (Kennedy, Independent) Share this | Link to this | Hansard source

I apologise, it was something I wanted to raise, but I will move back onto the superannuation issue.

In North Queensland we have the great treasure troves of Australia that need to be opened up. They need superannuation moneys; I do not think they can be opened up without superannuation moneys. We have 40 per cent of Australia's coal reserves in the Galilee Basin—40 per cent of the nation's entire coal reserves. They need probably $1,000 million or $2,000 million worth of railway line to go in there, Minister. That money can only come from superannuation funds. In the whole history of Australia this infrastructure has been built by government, except for in the last 25 years.

There was a 60-40 rule which existed in superannuation, Minister, which is very relevant to the amendment being moved by the opposition here. That 60-40 rule said 60 per cent of all superannuation moneys went into government securities. That money was used to build a canal to get our phosphate and our iron ore out from north-west Queensland, so instead of coming 1,200 kilometres back to Townsville it goes 300 kilometres on water up to the gulf.

We need electricity, and God bless your government, Minister, for already having committed $350 million—which is more than I can say for the incoming LNP government, who have knocked it on the head. They are not going to have any infrastructure at all, those stupid people. And, as I said, we need railway lines and we need one into the Galilee Basin.

So, Minister, the amendment, yes, but we would plead with you to look at the issue of superannuation moneys simply going into shares and inflating share prices, and into property and inflating property prices, and none of it going into nation building, where it has traditionally gone in the past. If it is government managed then it is secured by the government and you can safely return 7½ per cent, 9½ per cent, to the investors, which they will not get in the long term out of inflated share prices and inflated property prices. We applaud the opposition on this initiative, but we also applaud the minister and his work and we plead with him to address this problem, which I think is the greatest problem facing Australia today in our way forward.

Kelvin Thomson (Wills, Australian Labor Party) Share this | Link to this | Hansard source

The question is that the amendment be agreed to.

Bill read a second time.