Mathias Cormann (WA, Liberal Party, Shadow Assistant Treasurer) Share this | Hansard source

Minister Conroy is now getting active again on the interjection front. The coalition will propose a logical and sensible amendment that would address significant concerns with this bill in relation to the scale test. In government, should we be successful at the next election, we will implement the sensible corporate governance reform recommendations made by the Cooper review that would see mandatory disclosure of conflicts of interest, the appropriate provision of independent directors on superannuation fund boards and which would force directors who want to sit on multiple boards and where there is clearly an apparent risk of conflict of interest to be required to demonstrate to APRA that they do not have in fact any foreseeable conflicts of interest. There is also the issue of conflicts of interest in relation to related party transactions that do need further tidying up when it comes to corporate governance standards.

Schedule 1 of this bill contains provisions for the following additional statutory duties for trustees of superannuation funds. MySuper trustees must promote the financial interests of beneficiaries, in particular, returns; they must annually assess sufficiency of scale—the scale test, about which I will have something more to say in a moment—and they must include in their investment strategy and investment return target and level of risk for MySuper members. Trustees of registrable superannuation entities, or RSEs, must give priority to the interests of beneficiaries where conflicts arise; must exercise the same degree of care, skill and diligence as a prudent superannuation trustee; must have regard to valuation information, expected tax consequences and costs in their investment strategies; and offer a range of options sufficient to allow members to choose a diversified asset mix. They also must have an insurance strategy and meet additional duties in relation to insurance. They must formulate, regularly review and give effect to the risk management strategy and maintain and manage financial resources to cover operational risk.

The covenants are the default rules for trustee governance in super, similar to model rules for companies, and they would replace existing differently worded covenants contained in the Superannuation Industry (Supervision) Act 1993. Schedule 1 also sets out a series of new covenants and obligations that will apply to individual directors of corporate trustees and impose a personal liability on directors by deeming them to be parties to the governing rules of the trust.

In schedule 2, as Australia's prudential regulator, 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, but these materials are not legally binding. The Cooper review recommended APRA be given our standards-making power in relation to superannuation. The prudential standards would be determined and drafted by APRA, consistent with this schedule. They would be legislative instruments within the meaning of the Legislative Instruments Act 2003 and disallowable by parliament, and that is of course a change that we support.

In relation to the scale test I mentioned earlier, the coalition does have some serious concerns about the way the new scale test is provided for in this bill. I quote here from the explanatory memorandum that the government has circulated in relation to this bill, where it says that this bill requires trustees of superannuation funds to:

and some emphasis here—

relative to the financial interests of beneficiaries in MySuper products in other RSEs—

Now the industry experts, including the Financial Services Council, have indicated very clearly that such external comparison will be impossible to conduct in practice, as a trustee will not have sufficient knowledge of other registrable superannuation entities in order to make a valid judgment and to meet this test. The scale test is based on a presumption that larger funds invariably provide lower fees and higher returns to members when demonstrably that is not the case. There is no evidence to indicate that this presumption is correct in all cases and, while we intuitively might be of the view that biggest is best, the evidence in the marketplace is that that is not always the case, and I am sure that the government would have received similar representations on that point as the coalition has.

The scale test, if implemented in its proposed form, could be another potential source of advantage to the larger industry superannuation funds because they have existing scale. The scale test would create a significant new barrier to entry for new funds by making it difficult for them to achieve the required scale from the outset, which would lead to a reduction in competition in superannuation which of course manifestly is not in the public interest. 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 members but by concerns about meeting this technical and rather arbitrary test. Industry groups have submitted that a better alternative would be an internal test based on a finite list of factors rather than on an open-ended and poorly defined external test that the government has proposed. In relation to this, it should be noted that the government's own Cooper review into Australia's superannuation system did in fact recommend that a MySuper product should have a scale test that was quite differently pitched from what the government has put forward here in this legislation. The Cooper review recommendation was that trustees should 'actively examine and conclude whether on an annual basis its MySuper product has sufficient scale on its own with respect to both assets and number of members to continue providing optimum benefits to members'. This recommendation, with the use of the term 'sufficient scale on its own' clearly implies an internal test rather than the open-ended and poorly defined external test that the government is proposing in this legislation.

Mr Acting Deputy President, that might all sound rather technical and it might be difficult to follow for those who are listening to this debate as to what the implications of this legislation are. Let me provide you with this very clear assurance, that what the government is proposing to do will make it easier and will further concentrate the power of the larger union dominated industry funds at the expense of competition and efforts to maximise value for all superannuants across Australia. The government's approach is contrary to the recommendations that were made by the government's own review and inquiry into this particular area of legislation. Our job here is to act in the public interest, not just in the vested interest of the—