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

The Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012 does a number of things. It increases obligations on superannuation fund trustees and directors both generally for all super fund trustees and specifically for MySuper trustees. It also gives APRA, the regulator, the power to issue prudential standards in relation to various prudential matters in superannuation.

The coalition strongly supports genuine attempts to improve corporate governance and transparency for trustees and directors of superannuation funds. The coalition also strongly supports improvements and enhancements to prudential standards in superannuation. All of us have to continue to work hard to ensure that we have the most efficient, the most transparent and the most competitive superannuation system possible, with the most appropriate corporate governance and transparency standards in place. Of course, we still have some way to go in that regard, but only the most efficient, the most transparent and the most competitive superannuation system possible will help to maximise value for Australians with superannuation and, ultimately, the value of the retirement savings that Australians have in their superannuation.

However, the coalition cannot support this bill in its current form. The coalition will propose a very sensible and very constructive amendment that would significantly improve this bill by removing the government's proposed and unworkable scale test. This is because the government's version of the scale test is a vague and external test imposed on superannuation trustees which would make it impossible to administer in practice. As it is, it is already hard to attract properly qualified super fund trustees to these sorts of roles and the government, by making it even more complex and more uncertain for people who have to fulfil and take on those responsibilities, will make it even more difficult. If the amendment that the coalition very constructively will put forward is supported, we would be in a position to support the bill. If the amendment is not passed, the coalition will not be able to support the passage of this bill.

The coalition also has some concerns about a new provision in the bill that may impose personal liability on directors of superannuation fund boards to meet 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 superannuation fund. It is important to remember that the Cooper review commissioned by this government into Australia's superannuation system handed down its report back in June 2010, and it made of series of very sensible recommendations on how corporate governance in superannuation could and should be improved.

The government and the current minister for superannuation has either outright opposed or been very unenthusiastic about embracing some of these very sensible recommendations that have been made by the government's own Cooper review on how corporate governance in superannuation should be improved. So there is a lot of unfinished and unprogressed business here that we think the government should start to act on.

The Cooper review specifically recommended that disclosure of conflicts of interest be mandatory. Given some of the recent events across the broader union and union dominated industry super funds movement I would have thought that it is pretty self-evident that disclosure of conflicts of interest ought to be mandatory. Directors should be forced to properly disclose their remuneration in line with the provisions that apply for publicly listed companies. And the Cooper review did recommend that there be appropriate provision for independent directors on superannuation fund boards, a recommendation that the government, and Minister Shorten in particular, has refused to embrace because his friends in the union movement do not want him to act on that particular recommendation.

Very self-evidently, a very sensible recommendation made by the Cooper review was that those directors who want to sit on multiple boards should demonstrate to APRA that they do not have any foreseeable conflicts of interest. This seems to be completely non-controversial as a very sensible suggestion. Yet the government's legislation here before us does not include any of these very important and necessary improvements to the corporate governance and transparency framework in superannuation, because Minister Shorten does not want to pick a fight with his friends in the union movement, who do not want him to make these very important and sensible changes to corporate governance arrangements in superannuation.

I note that Minister Conroy, having been quite aggressive in his interjections early on, has gone very, very quiet.

Stephen Conroy (Victoria, Australian Labor Party, Deputy Leader of the Government in the Senate) Share this | Link to this | Hansard source

I've fallen asleep—it was so exciting!

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

The government continues to ignore those many sensible and important corporate governance recommendations from the Cooper review because the Labor government and Minister Shorten continue to put the interests of their friends in union dominated industry super funds ahead of the interests of all those Australians who have their retirement savings invested in the superannuation system.

Stephen Conroy (Victoria, Australian Labor Party, Deputy Leader of the Government in the Senate) Share this | Link to this | Hansard source

Union dominated? It is fifty-fifty.

Mathias Cormann (WA, Liberal Party, Shadow Assistant Treasurer) Share this | Link to 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—

Stephen Conroy (Victoria, Australian Labor Party, Deputy Leader of the Government in the Senate) Share this | Link to this | Hansard source

union dominated—

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

Yes, union dominated super funds. And I can see that Minister Conroy, like Minister Shorten, is right on song. The government should withdraw this provision and then embark on a proper consultation process with all participants in the superannuation industry, not just with—and here you can interject, Senator Conroy—one segment of the financial services market, to achieve a more appropriate, a more balanced, a more competitively neutral and a more workable outcome than the current flawed proposal. With MySuper not due to commence until 1 July 2013, there is sufficient time for the government to go back to the drawing board and get this important provision right.

Proposed section 52, on the personal liability of directors, of the Superannuation Industry Supervision Act 1993 imposes a series of statutory obligations and covenants on trustees of regulated superannuation funds. These covenants or obligations are exercised by the board of directors of the trustees acting collectively. The bill replaces the 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 includes proposed section 52A, which extends the covenants to individual directors of super funds. There is no equivalent provision in the current SIS Act. Proposed section 52A would make individual directors personally liable for any breach of the 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 interest of directors of super funds and which ensure that at all times directors of super funds put the interests of fund members ahead of any other interest including their own personal interest. But we have some strong concerns about the mechanism that the government has used in an attempt to achieve these aims.

The bill tries to introduce covenants that are imported into the governing rules of every single super fund and then tries to bind directors to those covenants by deeming each director to be a party to the governing rules of the super 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 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 that they may not provide certainty for directors who are trying to faithfully execute their duties so that they are complying with the law. The coalition is concerned that if implemented these provisions may discourage otherwise suitably qualified directors from accepting a role as directors of super boards. If high-quality inexperienced directors are discouraged from serving on superannuation boards by these provisions, it would have a severe impact on the quality of corporate governance of funds and on the performance of funds. This could result in lower investment returns and lower retirement savings for consumers because the best people to manage their investments have not chosen to be directors of those funds.

Again, the Cooper review made a series of sensible recommendations for reform of corporate governance and the duties of directors that have not been implemented by the government. The Cooper review noted the difficulty for trustees and directors in understanding what is expected of them under existing laws but it did not make any recommendation to extend the application of the SIS Act covenants for trustees to individual directors or for deemed directors of super funds to be parties to the funds' governing rules. They provisions of section 52A are confusing and they make the new laws even more unclear for directors especially given that proposed section 54A allows the government to introduce new covenants at any time in the future by regulation rather than by legislation. The coalition will closely monitor the impact of these proposed obligations on directors of superannuation funds when they come into force and will act in government to address any issues that may arise in the future.

The Cooper review did recommend, as I said at the outset, a number of changes which the government has outright opposed or chosen to ignore or only unenthusiastically embraced. There is a lot of unfinished business in superannuation, the most obvious of which is the need to ensure as a matter of absolute urgency that default funds under modern awards are selected through a more open, more transparent and more competitive process than is currently the case. The current arrangement by which default funds are selected under modern awards by Fair Work Australia is an absolute national disgrace. It is a closed shop, anticompetitive arrangement that is designed to favour the interests of union dominated industry super funds at the expense of Australians with superannuation. All Australians with superannuation should be able to benefit from genuine competition in the default fund market so that investment returns and the value of their retirement savings are ultimately maximised.

These are all areas in which a future coalition government will act. We will ensure that we have the most efficient, most transparent and most competitive superannuation system possible in place so that all Australians can have full confidence that their retirement savings over their working life will be maximised.

Matt Thistlethwaite (NSW, Australian Labor Party) Share this | Link to this | Hansard source

I speak in support of the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill. Superannuation is the backbone of the strength of the Australian economy. Australia, a relatively small nation in terms of our population, with around 22 million people, has the fourth largest pool of savings funds of any nation throughout world. In March 2011 APRA estimated the value of the pool of superannuation funds in Australia to be $1.3 trillion. What does that money go towards? What happens with the money that is sitting in that pool of superannuation funds?

In a market economy such as Australia, savings equals investment. In other words, all of that money that is sitting in the superannuation funds and bank accounts of Australians is invested in our economy. It is invested in businesses, it is invested in projects and it is invested in infrastructure. That is what has been occurring in the Australian economy. That is the reason our economy performed so well during the global financial crisis.

Anyone who has been to Sydney recently would have seen a new building that has popped up: No. 1 Bligh Street. It is an enormous building, about 40 storeys high. It is the most environmentally friendly building in Australia, having a six-star rating. It is being occupied as a commercial premises being leased by companies. What many people would not know is that that building was built by superannuation fund members. They invested in the building and construction of that project, creating thousands of jobs for Australians and creating a hallmark for environmental standards in our country. That building was built by Cbus, the construction and building unions superannuation fund, the people that Senator Cormann says are a union dominated superannuation fund. It was a wise investment by a smart set of trustees on a superannuation board. That pool of investment funds creates jobs in our economy, jobs for Australians.

I mentioned earlier that it is one of the reasons why Australia performed so well during the global financial crisis. Last year the Association of Superannuation Funds of Australia engaged Allen Consulting Group to prepare a report. The report, entitled Enhancing financial stability and economicgrowth: the contribution of superannuation, found: 'Superannuation funds were one of the main sources of equity financing for companies through private placements when debt financing became unavailable or unaffordable for Australian companies during the global financial crisis. The superannuation industry played a disproportionately large role in assisting corporate Australia to lower corporate risk during the global financial crisis.' During the global financial crisis we had instability in financial markets, with speculative investors withdrawing their funds—that money that ordinarily goes to funding projects, businesses and jobs in our economy. Because of the large pool of savings in superannuation, Australian superannuation funds entered the breach and invested and ensured that our economy remained strong. The crux of the report prepared by Allen Consulting is that superannuation in Australia is a winner—a winner for our economy, a winner for businesses, a winner for investment and a winner for members of those superannuation funds and their retirement savings.

As the pool of superannuation funds in our economy grows, so does the risk. There is an increasing risk of fraud, and we saw that occur with Trio Capital. Senator Cormann and I sat on the Senate inquiry into the collapse of Trio Capital. In the case of Trio, predominantly self-managed superannuation funds but also industry funds were subject to fraud, and many innocent Australians lost money because of the dishonesty of a few unreliable business people in this country. We also saw bad investment decisions and of course a general downturn in the economy. Many Australians and many people throughout the world lost money in terms of their superannuation balances during the global financial crisis because of the general downturn in the stock market.

Any good government makes sure that, periodically, a policy or particular law continues to meet its objectives. Just like getting your car serviced, it is important that, as a government, we continue to check that particular laws and policies meet their initial objectives and are delivering for the Australian people. That is what this government did in 2009 with superannuation. We commissioned Jeremy Cooper to undertake a comprehensive review of Australia's superannuation system—to check under the hood, if you like—to see if it was meeting its objectives of delivering adequate retirement savings for Australians but also doing so in an efficient, effective, fair and moral way. Jeremy Cooper published his report in 2010 after a year of consultation with people throughout the industry. He made 10 packages of recommendations. They included things like increasing the superannuation guarantee from nine to 12 per cent and introducing MySuper as a default, simple product that people could access that had low fees, simple investment decisions and the like. He also, importantly, made recommendations relating to trustee governance and investment governance.

This bill before the Senate today delivers those recommendations. It ensures that we are providing better outcomes for superannuation members in this country. It ensures that they can have greater trust in the way that their funds are being managed by trustees of superannuation funds. The way that we do this is through three elements. Those three elements are: to apply new trustee duties to superannuation entities that offer the default MySuper products, to expand the general duties of superannuation entities that hold licences and to introduce a power for APRA to make prudential standards.

The enhanced trustee duties will apply to any MySuper product or an entity that offers a MySuper product. They will include ensuring that the financial interests of MySuper members are placed above any other potential interests or conflicts that may come. They will also include an annual determination of scale. This means that the trustees have an obligation on an annual basis to check that the financial interests of their members are not disadvantaged in relation to those in other comparable funds due to insufficient assets and to ensure that members get adequate returns for their investment. The opposition are opposed to this, but it came about as a result of a recommendation from the Cooper review. It ensures that those who may be involved in smaller funds with smaller asset bases are not being disadvantaged compared to those in bigger or middle-tier schemes and ensures adequate investment returns for members. The trustees will look at targeting investment returns and the level of risk. The target will be an expected return over an average rolling period of 10 years. The trustees will look at the investment risk and the expected return over a 10-year period and report that to members of the fund so the members can make adequate decisions about where to invest in coming years.

There are also a set of new covenants or duties for superannuation funds in Australia and they go to the standard of care, skill and diligence that must be offered to members. A prudent superannuation trustee will be the new test which needs to be applied to the care, skill and diligence in operating a fund. Previously, the test was to apply to a prudent person, but the new test will be a prudent trustee. In relation to conflicts of interest, there is a new obligation on trustees to give priority to duties and interests of beneficiaries above all other persons and corporations. This ensures that the benefits and interests of a member are put ahead of any other potential decisions or conflicts that may arise that trustees have to consider.

There is a duty to act fairly in dealing with all classes of beneficiaries. In superannuation funds there are different classes of beneficiaries who invest in different schemes, depending on what stage of life they are at. This obligation ensures that the trustees of those superannuation funds consider all classes of beneficiaries, not particular classes of beneficiaries, in the operation of a fund. In terms of investment strategies, trustees are now obliged not just to look at the whole of the superannuation fund and its performance and decisions related to investment strategy but to go a level below and look at different classes of investors within particular funds. That will include looking at matters such as the amount of information that is given to particular classes of investors, the tax that they may pay and any ongoing liabilities that they may have in respect of their particular investment.

Another obligation will relate to insurance. On an annual basis, the trustees of the fund will be required to assess the insurance strategy that they are taking out on behalf of members. The RSE will be required to formulate, review and regularly look at the insurance strategy for the benefit of beneficiaries. That will include looking at the kinds of insurance that are offered to members of the fund, the level of insurance that may be appropriate to each fund member and, of course, the cost of that insurance.

A new obligation will be to assess, on an annual basis, operational risk. That does not mean investment risk; it means the operation of the fund and any risks associated with that. It relates to potentially failed internal processes and systems that may disadvantage fund members financially. Now, because of these reforms, trustees will be obliged to assess that risk on an annual basis. They will also be obliged to assess and develop a risk management strategy.

There are new covenants for individual directors. Where the rules do not include duties, they are taken to be included because of this law. Those duties are to act honestly, to act in the best interests of members of the superannuation fund and not to enter into a covenant that would be in conflict with the interests of superannuation fund members.

The aim of all of these reforms and of the new interests and duties that are introduced by this legislation is to ensure better service, better results and better efficiency for members of superannuation funds by applying higher standards. Again, these came about as a result of the extensive consultation undertaken by the Cooper review.

The third element of the reforms is to ensure that prudential standards are improved. The law gives APRA the power to make general standards with respect to superannuation funds relating to prudential conditions. This is consistent with the recommendations of the Cooper review. The prudential standards will be available to be made on any matters including: protecting the interests of members; ensuring that the conduct of a superannuation entity or licensee connected to that meets the reasonable expectation of members; keeping an RSE licence or connected entity in a sound financial position; ensuring the conduct of an RSE licensee does not cause or promote instability; the appointment of auditors and actuaries; and the conduct of audits and actuarial investigations. Again, this is ensuring that the standards that relate to superannuation are improved and increased in our economy and that superannuation fund members can have greater confidence that the checks and balances related to their investment are increasing, and that ultimately, hopefully, their fund performance will improve.

Senator Cormann made much of the issue associated with the elements of the bill that those opposite are opposed to. He mentioned the timeline of 1 July 2013 and said that there was adequate time to reform this bill and to go through another process of investigation. That is not the case at all. Although MySuper does begin on 1 July 2013, it will take APRA at least 12 months to write the prudential standards associated with the commencement of this bill. That is why it is important that the Senate pass this legislation today. I reiterate the point that Jeremy Cooper undertook a comprehensive, close to nine-month consultation with those who work in the industry, representing all different facets and organisations in the industry. He called for submissions and there was the opportunity for super fund members right up to the associations to have their point of view put. So there has been adequate consultation in respect of these reforms.

The aim of this bill is to improve the governance of superannuation funds in Australia, to improve the efficiency and the quality of the superannuation system in Australia, and to ensure that beneficiaries are maximising the returns and getting better information for their investment and their retirement savings in our economy. It also ensures that our economy maximises the investment that can be undertaken through superannuation and the benefits for our economy that flow from job creation and growth.

I do want to make a point about the comments of Senator Cormann and his 'union-dominated superannuation funds'. The fact is that those opposite have never been supporters of the introduction of superannuation. When it was introduced by the Keating government in 1992, those opposite opposed it. They could not bring themselves to agree to a scheme that allowed workers in this country some say over their retirement incomes. That view has never changed, and here we still hear the rhetoric from those opposite about union-dominated superannuation funds.

Let us look at the performance of these superannuation funds: $1.3 trillion in investment income for our country, which helped us to survive through the global financial crisis, and investment in projects in infrastructure, creating jobs for Australians. Some of those so-called union-dominated superannuation funds are the best-performing investment vehicles in our economy. It comes back to the fact that those opposite cannot, and have never been able to, bring themselves to agree that workers should have a say in the allocation of investment portfolios and money related to their retirement savings. That is what this is all about. They have never got over the fact, and they never will, that workers and their representatives have the right to sit on superannuation fund boards and make decisions about the allocation of investment funds in our economy. Every chance they have had they have tried to whittle down and water down that system. They introduced choice legislation during the years of the Howard government because they believed that by introducing choice workers would flee industry funds and go and set up their own superannuation funds or go out and join corporate funds and the like. And what happened? The position of industry funds was actually strengthened, because the best-performing funds—

Stephen Conroy (Victoria, Australian Labor Party, Deputy Leader of the Government in the Senate) Share this | Link to this | Hansard source

And they were cheaper.

Matt Thistlethwaite (NSW, Australian Labor Party) Share this | Link to this | Hansard source

As Senator Conroy points out, the cheapest funds were the industry superannuation funds. They were the best performing and the cheapest, so naturally workers and investors flocked to the industry funds. It backfired on the opposition and it will again, because this government is committed to increasing the pool of superannuation funds from nine to 12 per cent, to simplifying the system by introducing MySuper, to ensuring that Australians can have greater confidence that their pool of superannuation funds are being invested wisely and that the trustees' obligations are being increased. That is why this bill is necessary, and I commend the bill to the Senate.

Nick Xenophon (SA, Independent) Share this | Link to this | Hansard source

I would like to indicate my support for the provisions in the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012, particularly those aimed at greater accountability and transparency for superannuation funds. But we need to go further. The Cooper review into superannuation talks about the theory of 'rational and informed investors versus real-life experience'. Up until now the presumption has been to treat super fund members as informed and rational investors, which in an ideal world I am sure we all would be. But this is not an ideal world.

The report quotes from ABS figures which show that 46 per cent of 15- to 74-year-olds, approximately seven million people, would struggle to understand documents such as job applications and payroll forms; 53 per cent of people surveyed reached only the second of five levels in a practical numeracy test; and 70 per cent, or 10.6 million people, only managed to reach level 2 in a series of problem-solving exercises. The report states that the survey developers regard level 3 as the minimum required by individuals to 'meet the complex demands of everyday life and work'. Leaving that aside and apart from the obvious concerns this raises about our education system, it is clear that we cannot expect everyone to be a financial genius or even financially literate. Should these people—according to the ABS survey, the majority of our population—be disadvantaged? For many people super is something that is there to be thought about later; it is for old age. There are not many people I know who will voluntarily admit, even to themselves, that they fit into that category.

But superannuation is compulsory. We do have some choice about what fund, whether we make voluntary contributions and whether we direct our fund managers or leave them to it. Ultimately the law says we have to have superannuation, and most of us do not make an informed choice. If the government uphold superannuation as compulsory, as it should be, then they also have a responsibility to ensure the sector is appropriately regulated and that consumers are protected. The Cooper review, which the government are holding up as the basis for these reforms, states:

… there is presently a lack of transparency, comparability and, ultimately, accountability in the Australian superannuation system …

That, clearly, is the nub of the problem.

There is an unstoppable trend to increase transparency in the financial services sector, and that trend has in part been driven by a lack of trust in the financial services sector. I look to the work of those who have been campaigning for better governance and for better accountability over many years, such as Dean Paatsch of Ownership Matters and formerly of RiskMetrics. The key theme of the many opinion pieces that Mr Paatsch has written over the years, and his work, is about improving governance and transparency, and about getting meaningful information as to how your fund is performing and its compatibility with other funds. We just do not have that at the moment.

I applaud the government for the action it has taken so far and the further action it is planning to take, but there is far more we can do for consumers—for those who put their life savings, effectively, into these super funds. Firstly, consumers need to be able to make meaningful comparisons between funds. I acknowledge that there are provisions in the bill before us to require greater transparency from funds and for them to publish certain comparisons relating to scale. Clear and relevant information is important. Funds should be required to provide standard figures about returns, member numbers, fees, executive pay and commissions in a standardised format to allow for easy comparison. That is a given, and they are fundamental benchmarks. Ideally, however, commissions should not come into this question at all. Where there is an essentially compulsory product we need to move away from commissions, which are more likely to encourage risky behaviour on the part of fund managers and trustees.

I also note the provisions in this bill relating to conflicts of interest. I support the intention of this legislation, which is to require fund trustees to place the interests of their MySuper clients above any other interests. Ultimately, however, this raises the question of whether fund trustees should be required to disclose these conflicts and demonstrate exactly how they prioritise their interests. There also needs to be greater openness and communication on the part of the funds themselves. Funds should be open about answering questions in relation to their operations. A greater release of information would be likely to engage consumers with their funds, and provide them with the understanding and confidence to hold their funds to a higher standard.

Currently, for most consumers superannuation is all too hard. That is understandable, given the current complexities and the current lack of transparency. But as people get closer to retirement they tend to focus on their super more and begin digging through the paperwork, annual reports and carefully-worded statements to find out what all this could possibly mean for them in their retirement. Unfortunately, too many of them get a nasty shock and their last years at work are spent frantically trying to build up their fund to get them through retirement.

But if funds provided clear and relevant information and focused on engagement and conversation with their members, consumers would benefit in the long run. Funds need to consider the idea of direct discussions with their members, either through AGMs or other meetings. This is something that must be structured into funds so that every fund member has the right to attend an AGM in the same way as for a public company. There must be ways that this mechanism can be put in place and that the information provided to members is meaningful information; meaningful comparisons so that relevant questions can be asked about the performance of the fund and the governance of that fund.

I foreshadow that if this is something that the government does not come up with in its next tranche of reforms then I believe it is worth moving specific amendments to the legislation so that there is that level of transparency, accountability and engagement for individual fund members to attend a nominated meeting or participate via online and ask the directors of that super fund relevant questions and keep them accountable. Consumers need to be empowered to ask questions and insist on answers, and we do not have that now.

There are not many of us who would not complain if we were overcharged in a supermarket or restaurant. But because we do not have the information we need, we essentially can give some super funds a free pass. The basis of the Cooper report was that we need to move the superannuation sector from the idea of an 'engaged consumer' towards the idea of 'choice architecture'. The report explains this as the idea that if a consumer is financially literate and engaged then they should be able to make choices about their super funds, but if they are not then they should not be disadvantaged. According to the review, the super system should provide optimal outcomes for both. I strongly support this.

However, I believe that putting further, easy-to-understand and comparable information into the public sphere will help to engage consumers in superannuation. This further accountability should also be a priority for the government, given the significant amounts of government expenditure on superannuation. Taxpayers deserve to know their money is being well spent and that the appropriate safeguards are in place. They also deserve to know that their investments are being protected.

More importantly, there are issues such as long-term investment strategies and mandates that need to be considered. Given the importance of superannuation in our economy, both in terms of the investment and in terms of security for retirees, we should be opening the industry up further and encouraging funds to move away from liquid investments and more towards concrete investments such as infrastructure. I know that there has been a debate in the recent Senate committee hearing where David Farley from the Australian Agricultural Company talked about the importance of superannuation funds investing in Australian agriculture. I think that is a very real issue, and that if we had greater transparency and a more accountable system it would encourage that.

While these types of investments may not have the short-term gains generally associated with super funds, they are likely to have better and more secure returns in the long run. Ultimately, we have been presented with the ideal opportunity to reform the superannuation industry in Australia. Given our ageing population and uncertainty about global finances, there has never been a better time. I can indicate my support for this bill, and I hope that this is only the beginning of this discussion and the necessary reforms.

Sue Boyce (Queensland, Liberal Party) Share this | Link to this | Hansard source

I would like to acknowledge Senator Xenophon's contribution and the thought he has put into the issue of personal superannuation. One of the biggest problems that I see in this area is, of course, that lack of engaged consumers. People do not see their superannuation money—it comes out of their wages before they receive their wages—and, until their minds are focused by wanting to retire or a desperate need for funds, on the subject of super people often behave as though it is not really their money. So it is incumbent on this parliament not only to come up with good suggestions to make consumers more literate and to try to encourage them to engage more but also to make sure that the governance around superannuation is as good, as strong and as practical as possible. That is certainly something this legislation does not do. We have the usual charade from the government of dribbling through bits and pieces of legislation which leave all the stakeholders saying: 'We think the intention's good. We're a bit worried about the detail that we can understand and, of course, until we see the whole picture'—which they never do—'we can't say whether we support this legislation or not.'

The Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012 that we are looking at will make a number of changes. It is basically part, but only part, of the government's response to the Cooper review in 2010. What has happened is that the government have picked out little bits and pieces. It is impossible to understand the criteria they have used for picking out the bits and pieces they have, other than thinking that very firmly in their view is the idea of ensuring that the union industry funds are well supported so that they can continue to support the Australian Labor Party. The first step in this continuing saga was the introduction of the Superannuation Legislation Amendment (MySuper Core Provisions) Bill in 2011. That bill established MySuper as a standardised, low-frills, no-fee superannuation product available as a basic option but not compulsory. It was intended to be the default fund that would be automatically chosen if employees did not make a decision. Now we have a second bite of the cherry in the Stronger Super reforms.

Certainly one thing that came through during our inquiry into this legislation was that the government's staggered release of bits and pieces of the legislation around super was not aiding clarity or consistency and it was creating uncertainty and confusion in the sector. Of course, the uncertainty and confusion are not helped by the fact that this bill also introduces new definitions and new trustees' duties which are unclear, not least because they depart from the current regime of trustees' duties. I cannot imagine anyone in their right mind choosing to be a trustee or a company director if they did not know what the rules of being a good trustee or company director were. So this will make it almost impossible for trustees and directors to comply with the legislation, because they cannot understand the core components of it, and it will expose directors to uncertainty and risk. Why would anyone take it on in that circumstance?

The Law Council of Australia, in its submission to the Parliamentary Joint Committee on Corporations and Financial Services, said:

In order to promote compliance, legislation should be clear and certain. This is particularly the case when personal liability can flow from a breach—

as it can for a company director or a director of a superannuation fund.

Legislation should also be consistent. There are examples where the Bill uses terms found in case law and other legislation, but in slightly different ways.

Pity the poor judge that has to sort out what that means—and inevitably, of course, there will be cases when this sort of confusion is apparently deliberately put into the law. The Law Council went on to say:

Again, this raises the question of whether differences in language reflect differences in duties or standards.

So here we are dealing with a poorly drafted bill which rather than assisting the superannuation industry and the beneficiaries, who we need to remember are the workers of Australia, in many respects creates ambiguity and because of that increases the level of risk and the level of complexity and, of course—something that this government is excellent at—increases the level of red tape. Trustees and directors will need to watch their back because of the uncertainty in this legislation. In some ways I guess this bill captures the very essence of the government led by Prime Minister Gillard: it is poorly thought through, it is badly drafted and the people who will wear the consequences of it over time will be Australian superannuants.

A survey recently by the Australian Taxation Office found that only 10 per cent of people were aware of the superannuation reforms that the Gillard government was undertaking. So much for engaged consumers! So much for efforts from the government to even try to engage consumers! I suspect that there is quite a happy group who think the less workers know about what is happening to their super the better. I would encourage people to take note because the government is doing a very good job of messing up what should be significant and useful reforms. And we are talking about, of course, the livelihoods and income of older Australians.

There is currently $1.3 billion annually put into the super funds, and the industry is boosted, of course, by the compulsory nature of superannuation contributions, which are currently nine per cent but are going up to 12 per cent over the next six years. Once again I urge all policymakers to think about the need for people to see and be engaged with the taking of superannuation from their pay packets. I think Senator Xenophon's suggestion of an annual information night or something might be a starting point, but certainly superannuation bodies and the government are not doing enough at the moment to keep consumers informed about superannuation, let alone engaged in the question.

I would also like to look at one of the worst features of this bill: the scale test. We on the coalition side see that as a standout example of bad policy; and, unless there are amendments here, we will not be supporting this bill. We have serious concerns about the new scale test provided in the bill which requires trustees of superannuation funds, according to the explanatory memorandum:

… 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;

The first question is: how on earth does a superannuation fund know whether its scale disadvantages the financial interests of beneficiaries comparable to other funds? Industry experts such as the Financial Services Council have said that such external comparison would be impossible to conduct in practice as a trustee would not have sufficient knowledge of other registerable superannuation entities so that they could carry out this test. Is the government suggesting that we have open-book funds? If so, perhaps they should be putting some legislation through on that.

The scale test is based on a presumption that, the larger the fund, the more likely there will be lower fees and higher returns to members. Once again we have no evidence whatsoever to indicate that this presumption is true. It may be true in some cases, but there is no evidence to suggest that it is correct in all cases. Gut feeling might tell you that, the bigger the fund, the lower the fees and the higher the returns, but that is all we have here. There has been no proper analysis done by the government. There has been some fudging of figures by industry super funds to try to ensure that their funds look cheaper without showing the entire picture of the costs and the benefits of each fund.

The scale test, if implemented in its proposed form, would be another potential source of advantage to the larger industry superannuation funds because they already have that existing scale in terms of assets and beneficiaries. The scale test would create a significant new barrier to entry for new funds by making it very difficult for them to scale up to the level where they could be confident that, for the first year or so of operation, they were not disadvantaging the financial interests of their beneficiaries.

The scale test is also anticompetitive, which is not at all what I believe Jeremy Cooper had in mind when he made proposals around the scale test. He said in the Cooper review that MySuper products should have a scale test but that the 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 optimal benefits to members.

That, of course, is quite different from expecting trustees each year to work out if their fund was the best fund. Where do we end up with this if any financial disadvantage is the issue? Do we end up with one fund? Inevitably some funds will function better in some years than others. No wonder directors are very concerned about this legislation.

The Association of Superannuation Funds of Australia said during the hearing that our committee conducted into this:

… the current wording of the scale test is problematic. On speaking to Treasury, we believe that guidance will be provided by APRA.

That is wonderful, isn't it? APRA might provide some guidance—not some law or some regulation but some guidance. The Association of Superannuation Funds went on to say:

In terms of being able to provide for fund members, size of portfolio and number of members are certainly two factors, but there are other factors as well. In our view, fund trustees, as part of their best interest duties, have to look each year at whether or not they are able to provide services in the best interests of their members. So our initial view is very much that the—and certainly part of the consultation process—whole scale test may produce the wrong results.

The Corporate Super Association also said the scale test was unnecessary, and they took the view that investments and risk covenants for all RSE trustees are sufficient requirements, that trustees should not be operating a fund or MySuper product when assets and member numbers do not lend sufficient economies of scale to support a viable product.

I hope Minister Shorten is aware that in fact there is no correlation between the size of a fund and the size of individual portfolios within that fund, so why a scale test on this particular basis is included in the bill is beyond me. The issue of scale must be a matter of judgment, and legislating for an exercise of judgment simply will not work. We are giving directors rules that are impossible for them to function within and asking them not to use their own judgment on what they think constitutes being in the best interests of their beneficiaries but rather what Minister Shorten thinks might be in the best interests of the industry super funds.

The scale test is anticompetitive. Large funds will be precluded from investing in small and medium-sized companies. The bill actually legislates against one of the very foundations of an investment strategy: having a diversified portfolio. Not only do we have this as a barrier of entry for new funds; we also have this problem where there will be fewer funds flowing into small and medium-sized public company shareholdings. The requirements of the scale test will be difficult, if not impossible, for trustees and directors to comply with because there is no clarity around the terminology and there is a lack of certainty with the benchmarks against which trustees are required to measure their fund.

The coalition is particularly concerned that the government has picked up bits of the Cooper review in some areas and ignored it completely in other areas. I have no idea why you would try to improve governance by telling directors to measure themselves against everybody else in the market but not include some of the other governance matters Cooper canvassed. In the area of conflict of interest, for example, the government has completely ignored the recommendation for the disclosure of conflict of interests being made mandatory. Why has it ignored that? The disclosure requirements vary depending on the type of superannuation fund. And it is quite reasonable that publicly listed funds have more robust disclosure requirements. But the level of disclosure should be uniform across all superannuation funds because they are dealing with the same product and the same group of clients, the same beneficiaries—the superannuates of Australia.

Taking a lead in this regard, the Financial Services Council, which represents the for-profit funds—the people that one suspects the government rather dislikes—released a voluntary code in March in 2012 with the following features: superannuation funds must have an independent chair; the majority of directors must be independent; remuneration of directors and senior management must be disclosed when they are paid from the trust; directors must not hold multiple and competing superannuation fund board positions; the fund must develop an environmental, social and governance risk management policy that is made available to members; and the fund must develop and publicly disclose a proxy-voting policy and publish its Australian proxy-voting record. This would be an excellent code if only this government would pick it up and apply it to the industry funds. But the massive conflict of interest within the union dominated industry funds is exactly what the government is shying away from doing anything about.

AustralianSuper, which is the largest industry fund, oversees $42 billion of retirement savings. On its board we have people such as Paul Howes from the Australian Workers Union and Dave Oliver, the ACTU Secretary. They are representing the interests—the individual interests, remember—of every beneficiary: the individual interests of 1.8 million workers. AustralianSuper invests in companies such as Woolworths, BHP and Rio Tinto. So I do not know how people such as Mr Howes or Mr Oliver can be on that board representing the best individual interests of the beneficiaries of the fund while, at the same time, planning industrial action against some of the shareholding companies. How does that work? How is that not a blatant and obvious conflict of interest? It is impossible to criticise a company by saying, 'Frankly, monkeys could do a better job,' which is what Mr Howes said about Rio Tinto, while, at the same time, saying, 'I have bought the shares in this company to assist our members to make a profit.' It is a ridiculous sham. This legislation must be amended.

Don Farrell (SA, Australian Labor Party, Parliamentary Secretary for Sustainability and Urban Water) Share this | Link to this | Hansard source

I would like to thank those people who made a contribution to this debate, particularly Senator Thistlethwaite, who I thought accurately depicted the nature of this legislation, and also Senator Xenophon, who I also think had a valuable contribution to make.

The bill contains measures that implement changes recommended by the review into the governance efficiency structure and operation of Australia's superannuation system, chaired by Jeremy Cooper. Schedule 1 of this bill applies to duties of trustees, including a requirement to give priority to beneficiaries over other persons where a conflict may exist. Trustees will also have expanded requirements in relation to their investment strategies. They will have a new requirement to develop an insurance strategy for members of their fund and a risk management strategy and also to meet a requirement to maintain financial resources either as trustee capital or as fund reserves to cover the operational risks of the funds that they manage.

Trustees that offer MySuper products will have additional obligations reflecting that these members have effectively delegated all decisions of their superannuation to the trustee. This bill also clearly identifies the duties that apply to the individuals who are directors or corporate trustees of superannuation funds, including acting honestly and in the best interests of their members. Schedule 1 will apply from 1 July 2013. Schedule 2 to the bill will provide APRA with the ability to make prudential standards. I commend the bill to the Senate.

Question agreed to.

Bill read a second time.