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Monday, 29 October 2012
Page: 12211

Mr FLETCHER (Bradfield) (13:14): I am very pleased to rise to speak on the Superannuation Laws Amendment (Capital Gains Tax Relief and Other Efficiency Measures) Bill 2012. I want to focus in particular on one of the principal measures in this bill, which is to provide capital gains and other tax relief for merging superannuation funds. The policy rationale for that, stated in the explanatory memorandum, is to encourage the merger of small superannuation funds and in turn deliver benefits to members through economies of scale.

In the time available to me today I want to make three points. Firstly, I want to make the point that capital gains tax relief for the merging of superannuation funds is a reasonable idea, as far as it goes. Secondly, I want to spend a moment speaking about the serious public policy problem which this bill is designed to address—namely, that there is a long tail of small superannuation funds. Thirdly, I want to make the point that we need to have a more comprehensive look at the issue of the long tail of small funds and ask whether the measures in this bill go far enough.

I turn firstly to the proposition that the measure to give tax relief contained in this bill is a sensible idea as far as it goes. I remind the House that superannuation is designed to be a tax advantaged vehicle for the accumulation of retirement savings. The ultimate policy intention is to allow as many Australians as possible to build up savings and hence provide, wholly or partly, for themselves in retirement rather than relying on the old-age pension. This year the old-age pension will comprise around $37 billion of Commonwealth expenditure, which is around 10 per cent of the entire Commonwealth government expenditure. So, clearly, the policy prize if we can reduce the reliance on the old-age pension is a very significant one.

The problem which this bill is specifically designed to address is that we have too many small, subscale, superannuation funds. Accordingly, anything which would act as an impediment to funds merging and therefore allowing average fund size to increase needs careful consideration. A factor which presently acts as an impediment today is that, if superannuation funds merge, there are adverse tax consequences for the members of the fund. First of all, the transfer of assets which typically occurs as part of a merger is a capital gains tax event. In the attractive jargon of the Income Tax Assessment Act, it might be a CGT event A1, the disposal of a capital gains tax asset, or it might be a CGT event E2, the transfer of a capital gains tax asset to a trust. In either event, it triggers an obligation to pay capital gains tax. Secondly, typically in such a transaction, one of the existing funds will be wound up. That means that any existing tax losses held within that fund can no longer be used. That, additionally, is a factor which negatively impacts on the net value of the assets in the fund and in turn on the value of the balances held by members.

Given that the very purpose of superannuation is to accumulate assets in a concessional tax environment, it is understandable that trustees would be wary of proceeding with a merger given the current tax consequences, where it is likely to reduce the value of members' balances. Accordingly, a change to the law which removes this impediment, this blocker, to mergers of superannuation funds, makes sense in principle. That is certainly the view of this side of the House.

Let me turn secondly to the underlying policy problem which this measure is designed to address. In the words of the explanatory memorandum, the intention is to:

… put pressure on superannuation funds to improve their competitiveness or reassess their viability in the absence of merging with another entity.

And it is to encourage:

… increased size or scale of superannuation funds to enable funds to provide a range of benefits to members …

Let's be a bit clearer about what the problem is here: we have a long tail of small superannuation funds. We should also be clear that small funds are not of themselves a problem. It is certainly possible that a small fund might have superior investment skills such that it generates above normal returns and that those excess returns more than compensate for any extra costs which result from its smaller size. But, when the size and composition of a superannuation fund has been determined not on the basis of rational economic considerations but on quite different considerations, there is every possibility of a small fund delivering inadequate returns.

Our present superannuation system comprises many different funds, some small and some large. The particular basis on which the money has been divided up—and, hence, the basis on which an employee has his or her retirement savings allocated to any one fund—is driven quite heavily by the architecture of the union movement. This is a very important public policy question because the superannuation system has grown very large, with some $1.4 trillion of funds under management. Largely thanks to compulsory super contributions, in 2011-12, some $90 billion flowed into the sector. Of that, nearly two-thirds went into one of two kinds of funds: industry funds or public sector funds. Funds of this kind generally use the 'equal representation' model, with half of the directors appointed by a union and half by an employer association.

In the APRA statistics, for the 2010-11 financial year there were 76 funds listed as 'industry' or 'public sector'. An analysis of the annual reports of these funds shows that in 2010-11 there were a total of 575 directors on their boards, of whom 180 were appointed by unions. These funds had a total of $370 billion under management as at 30 June 2011, according to the APRA statistics, and the biggest 10 funds had around 63 per cent of this total. This leaves a long tail of much smaller funds. In fact, of the 76 funds, 57 are less than $5 billion in size, and at least 20 have assets of less than $1 billion.

Let me mention some examples. The Australian Meat Industry Superannuation Trust had net assets of $990 million as at 30 June 2011. The Health Industry Plan had net assets of $612 million. AUST(Q), otherwise known as the Allied Unions Superannuation Trust (Queensland), had net assets of $193 million. The Transport Industry Superannuation Fund had net assets of $84 million. I make no criticism of the specific managements of the funds I have mentioned, but I do raise the question of whether it best serves the interests of members to have a large number of quite small funds. That of course is the very question which the measures in this legislation are designed to address. I think we can see that there is an underlying public policy problem.

The real question, though, is whether the measures in this legislation will go far enough, and that is the third point I want to come to. How likely is it that desirable mergers will occur just because the tax impediments to such mergers are reduced, when we have the structural features of our superannuation system which I have described? The recent failure of the merger between Vision Super and Equipsuper in Victoria is not an encouraging precedent. Vision Super has four directors appointed by the Australian Services Union. The merged entity was supposed to have elected directors. It turned out that a member of the Equipsuper fund—somebody who happened to be a senior manager at a power company—chose to seek election as a board member of the merged super fund. This made the Australian Services Union very cross. In an email to Australian Services Union members, the state secretary of the union, Brian Parkinson, had this to say:

As expected, employers are seeking election to workers' positions. Indeed, one such individual … has exploited his senior management role to frustrate the election chances of ASU candidates … Management will pull out all the stops to see one of their own elected at the expense of workers.

At the time of sending this email, Mr Parkinson was also a director of Vision Super. He had duties to the members of that fund, and the transaction was conceived as being in the interests of those members. Yet, pretty clearly, when Mr Parkinson sent this email he was not giving much thought to the interests of members of Vision Super; what he was concerned about was the interests of the Australian Services Union.

We need to look very closely at whether the measures in this legislation will do much to assist the position when relatively small superannuation funds are very closely aligned with unions. It is quite easy to see how a governance problem in a union could infect an associated superannuation fund. We have seen such an example quite recently with the former Health Services Union boss Michael Williamson, until recently a union appointed director of First State Super, a fund with some $30 billion under management. Earlier this year, the chairman of First State Super complained that he had no power to remove Mr Williamson as a trustee of that fund, despite the serious allegations, at that point, which had been made about Mr Williamson's conduct. Of course, since that point he has been charged by the New South Wales police.

An equally troubling example of this phenomenon is a $30 million investment in the building company Austcorp by the Meat Industry Employees Superannuation Fund, almost all of which was lost following Austcorp's collapse in 2009. The Australian has reported that Mr Wally Curran, a long-time secretary of the Meatworkers Union and a long-serving director on the board of the fund, was paid significant consultancy fees by Austcorp. At the very least, this raises serious questions about whether Mr Curran had a conflict of interest and whether he was acting in the best interests of members of the fund. That $30 million, by the way, was a material proportion of the entire balance of the assets of the Meat Industry Employees Superannuation Fund.

Or we could consider the position of TWUSUPER, a fund with $2.6 billion under management and 130,000 members, with four directors appointed by the Transport Workers Union. The four directors appointed are the Transport Workers Union's federal secretary, Tony Sheldon, and three state secretaries: Wayne Forno, Wayne Mader and Jim McGiveron. Last year the Transport Workers Union vigorously attacked changes proposed by the management of Qantas to the operation of that company, changes that management said would improve the company's financial performance. How do the directors of TWUSUPER, who are also union officials, think about equity investments in Qantas or other companies in the transport sector? Members of TWUSUPER have a right to expect that the sole consideration exercising the minds of directors is how to maximise the financial returns generated by the fund. Indeed, under the sole purpose test in the Superannuation Industry (Supervision) Act, that is the duty of directors of that superannuation fund.

So there is clearly a structural problem in the superannuation sector, particularly in relation to industry and public sector funds, where there is a long tail of small funds. As some of the instances I have cited highlight, this creates the potential for inadequate standards of governance, particularly amongst that long tail of smaller funds, which are not subject to the same degree of detailed public scrutiny as larger funds tend to be. The question I also want to raise for consideration by the House this afternoon is whether the well-intentioned measure in the legislation before the House today goes far enough to encourage the consolidation which it says is a desirable objective, when you consider some of the entrenched interests of directors of funds. I think the email that I cited from ASU state secretary Brian Parkinson is extremely relevant in that regard.

Let me conclude by noting that the measures in this bill are intended to assist in facilitating the mergers of superannuation funds by offering capital gains and other tax relief for such mergers and in turn to address the problem, which clearly exists, of a long tail of subscale funds. I hasten to add that the mere fact that a fund is small does not of itself indicate a problem, but we have seen that, where there are small funds, particularly ones closely associated with unions, that creates a culture in which governance problems appear to be more likely to materialise. The only way to get to grips with this issue is to seriously address the governance of superannuation funds and in particular the recommendations of the Cooper review in relation to ending the current form of the equal representation model. It is a matter for regret that the Minister for Employment and Workplace Relations and Minister for Financial Services and Superannuation and former National Secretary of the Australian Workers Union has done nothing about that.

Debate adjourned