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Tuesday, 22 May 2012
Page: 5096


Mr FLETCHER (Bradfield) (21:09): I am pleased to rise to speak on the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012. This bill amends the Superannuation Industry (Supervision) Act and purportedly increases governance standards for superannuation funds. Unfortunately, as is often the case, the reality is somewhat different from the promise. In the brief time available to me this evening I want to focus on three aspects of the bill which, in the coalition's view, are deeply troubling. The first is that the government has cherry-picked a small selection of the governance reforms recommended by the Cooper review and has conveniently neglected reforms which do not suit the agenda of its union mates. 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. Thirdly, the provisions which impose additional obligations on directors are ill-conceived and go too far.

Let me turn to the first point, about the extent to which the government has cherry-picked certain changes recommended by the Cooper review into superannuation and has ignored other key recommendations, including the recommendation that the disclosure of conflict of interest should be mandatory and the recommendation that the so-called equal representation model should no longer be mandatory. Of course, I need hardly add that the equal representation model is code for union officials having a privileged role in the governance of superannuation funds. Another reform recommended by the Cooper review which is ignored in this legislation is that, where the equal representation model continues to apply to a superannuation fund, at least one-third of the directors on the board should be independent.

In light of the scandalously bad state of governance recently revealed in the Health Services Union, and the flow-on implications for superannuation funds, these governance issues are of urgent importance. Let me remind the House that the government's problems with the Health Services Union are so severe that the Australian Council of Trade Unions has cut its ties with the Health Services Union. Yet until recently a significant number of Health Services Union directors have been appointed to the board of major superannuation funds, and several Health Services Union officials remain directors of major superannuation funds.

Let me remind the House that Health Services Union boss Michael Williamson, a man against whom very serious allegations of corruption have been made, was until recently a union appointed director of First State Super, a fund with some $30 billion under management, funds which are there to provide for the retirement incomes of current and former New South Wales public servants. Just last month the chairman of First State Super complained that he had no power to remove Mr Williamson as a trustee of that fund despite the very serious allegations which had been made about Mr Williamson's conduct.

Other Health Services Union officials on superannuation fund boards include Mr Peter Mylan, who is still on the board of First State Super. He is the assistant secretary of the Health Services Union of New South Wales and was recently described in the Australian as a long-time Williamson loyalist. Rosemary Kelly and Lloyd Williams, two other HSU officials, are both directors of HESTA, which has $18.3 billion of funds under management. Those who listened carefully to the member for Dobell's statement yesterday would have noted with interest his allegations about another HSU official, Kathy Jackson. The member for Dobell alleged that she was recently on the board of HESTA but stepped down once it became the policy of the union that directors fees needed to be paid to the union. I have not tested whether the allegation is correct or not, but it is an interesting insight into the attitude of the member for Dobell, a former union official, about the way positions on superannuation fund boards are broadly seen as prizes to be handed out to union officials.

It is curious indeed that a union whose affairs have become a byword for mismanagement, corruption and failure of governance is in a position, by reason of design features of the superannuation system put in place by the Keating Labor government, to appoint its officials to the boards of major superannuation funds with responsibility for many billions of dollars. As the chairman of First State Super complained last month, if the conduct of the directors proves to be problematic or if there are other reasons why it might decide to remove them from the board, there is no capacity to do so because the appointment to the board is wholly in the gift of the relevant union.

This is not specific to the Health Services Union. This is a systemic issue. There are dozens of superannuation funds in Australia which have up to half of their directors appointed by a union. That means that if there are flaws in governance, if there are flaws in the organisational culture in those unions then there is a real risk of those cultural flaws being transmitted to the superannuation funds. That is a matter which should be of great concern to the millions of Australians, most of whom are not associated with unions at all, most of whom are not union members, who have their superannuation savings invested in these funds on which union appointed directors sit.

You would have thought that this bill before the House, dealing as it does with the governance of superannuation funds, purporting as it does to give effect to the recommendations of the Cooper review, would have dealt with the recommendation in the Cooper review to deal with the so-called model under which union officials have a privileged appointment position on boards of superannuation funds, the so-called equal representation model. You would have thought that this would have been the perfect opportunity to give effect to the recommendation of the Cooper review that the equal representation model should no longer be mandatory. But Minister Shorten has chosen not to implement that recommendation. I note in passing that Minister Shorten is a former union official and a former union appointed director of a superannuation fund. I note that Minister Shorten was quoted as saying about the Fair Work Australia report into the Health Services Union scandal that he was 'appalled'. I am reminded of Captain Renault in Casablanca who was 'shocked' to discover that there was gambling going on.

Let me turn to the second issue I want to raise, which is the scale test. This bill purports to impose a so-called scale test, which is fundamentally misconceived. It would impose upon directors a black letter law obligation each year to determine if there is sufficient scale in the fund—that is code for saying that the fund is big enough such that members are not disadvantaged. It is a bad idea for three reasons: it is deeply anticompetitive and serves the interests of the big funds while making it harder for smaller and newer entrants; the idea that scale is an absolute good is wrong; and the test as drafted is unclear, impractical and unworkable.

Firstly, it is deeply anticompetitive to say we will put into the legislation a criterion that the big funds can automatically meet and that the small funds are at a systemic disadvantage in meeting. It is hardly surprising in this context that the scale test has been pushed by the Industry Super Network, the lobby group that represents large industry funds such as Australian Super. Again, I remind the House it was a predecessor organisation of Australian Super that the present Minister for Financial Services and Superannuation was formerly a director of. I also remind the House that two other members of the parliamentary Labor Party, the minister for climate change and Senator Doug Cameron, were also former directors of Australian Super. In other words, there is a real concern that the policy agenda of the big funds is being pursued by this government. It is interesting that the Australian Institute of Superannuation Trustees, which represents the trustees of super funds across the board including industry super funds, is opposed to the scale test. They told the joint parliamentary committee:

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 the overwhelming obligation upon trustees … and this obligation should not be clouded, diminished or distracted by other considerations including scale.

The second reason why the scale test is a bad idea is that it is simply wrong that scale is an absolute good when it comes to investing money. It is well accepted, in fact, that investment funds that are too big compared to the size of the market will effectively be precluded from taking up many investment opportunities. They cannot easily invest in small companies because the size of the investment stake they need to make as a proportion of their large fund would swamp the size of the company they were trying to invest in. This is a well acknowledged problem in the whole area of funds management—that is, when the fund becomes too big certain investment opportunities, particularly in smaller companies, are precluded. And that is just one instance of the general proposition that to claim that scale is an absolute good, and that that is an uncontested matter such that it should be put into legislation, is fundamentally ill conceived.

Thirdly, the test as drafted is unclear, impractical and unworkable. As the financial services counsellors pointed out, it means that directors will be required to make a comparison with other superannuation funds when they may very well not have available to them the relevant information about the other funds. The nature of the agreement between a fund and its service providers may not be publicly known. So it is very bad policy indeed to put into legislation a provision which is so poorly drafted that in practical terms it is very difficult for directors of a trustee company to know what they have to do to comply with it.

The ill-judged provisions in this bill seek to impose additional obligations on the directors of a corporate trustee as well as upon the trustee itself, for example, the duty to act honestly in all matters concerning the superannuation entity and a whole range of others. They all sound very worthwhile in principle. But when we consider the practicalities, one of the issues which is troubling is that the Cooper review essentially recommended that there ought to be the merger of the office of director and the office of trustee. The government correctly rejected that recommendation because of the confusion that would result, and yet this bill is now taking up that suggestion again.

One of the things that is very troubling about these provisions is that they potentially make directors of a corporate trustee personally liable to beneficiaries. They materially deviate from the position in the current Corporations Law in which the obligations of a company are not ordinarily ascribed to directors. They will undoubtedly make it more difficult to recruit high-quality directors to the boards of superannuation funds, because they will find themselves bearing specific obligations which are not borne by directors under the general corporate law. So these provisions have been very poorly thought through. There is a great deal of angst about them amongst what might be called the community of professional directors. The coalition has stated that we will be moving amendments designed to remove the provisions which result in this additional liability.

I am sorry to have to tell the House that this bill, like much of what this government does, is not what it purports to be. This bill is purportedly motivated by a high-minded intention to improve the governance of superannuation funds, and as a principle that is one we can all sign on to. I strongly endorse the comments made by members of the House on both sides that superannuation is an extremely important savings vehicle. But it is very hard to overlook the clear fact that this bill fails, and conspicuously fails, to address the most important of the reforms which were recommended by the Cooper review, particularly reforms designed to break the union stranglehold on industry super funds. And the reason is undoubtedly the fact that the present minister, and those who put him into his position, like the current arrangements. The scale test is bad policy. There are key aspects of this legislation we oppose.