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Tuesday, 14 August 2012
Page: 5037

Senator CORMANN (Western Australia) (12:48): 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.

Senator Conroy: I've fallen asleep—it was so exciting!

Senator CORMANN: 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.

Senator Conroy: Union dominated? It is fifty-fifty.

Senator CORMANN: 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:

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—

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—

Senator Conroy: Union dominated—

Senator CORMANN: 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.