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Economics Legislation Committee

CERCHE, Mr Mark, Chairman, Corporate Superannuation Association

GARCIA, Mr Tom, Chief Executive Officer, Australian Institute of Superannuation Trustees

SCHEERLINCK, Ms Eva, Executive Manager, Governance and Stewardship, Australian Institute of Superannuation Trustees


CHAIR: Welcome.

Member of the audience interjecting—

CHAIR: Order!

Member of the audience interjecting—

CHAIR: I will suspend this hearing.

Proceedings suspended from 10:47 to 10:49

CHAIR: We will reconvene. The committee has received submissions from the Australian Institute of Superannuation Trustees, which we have numbered as submission No. 7. Do you wish to make any adjustments to your submission?

Mr Garcia : No, we do not wish to.

CHAIR: The committee has also received a submission from Corporate Superannuation Association, which we have numbered as submission No. 5. Do you wish to make any adjustments to your submission?

Mr Cerche : No, Chair.

CHAIR: I now invite you to make a short opening statement.

Mr Garcia : Thank you, Chair and committee members, for the invitation to brief the Senate Economics Legislation Committee on the Superannuation Legislation Amendment (Trustee Governance) Bill 2015. AIST is an association whose 4,500 members are the trustees and staff of 60 not-for-profit funds—industry, corporate and government—all utilising the equal representative governance model. There is roughly $650 billion under management and almost two-thirds of working Australians by fund membership.

AIST opposes this bill. We oppose both its reach and its drafting. We absolutely oppose the abolition of equal representation and see it as a retrograde step for our superannuation system. Further, we dispute the stated objectives and question if in fact this bill will achieve them. However, we would like to make clear that AIST is not opposed to independent directors on super fund boards. More than 60 of the 600 director members of AIST are independent under the current definition. We recognise the value that an independent director can make when a board needs to fill a particular skills gap. However, it should be up to the individual funds to identify the needs for the directors that they believe will help them best fulfil their strategy. They should not be subjected to a legislative quota.

We contend that having independence on boards and having equal representation are not mutually exclusive. The stated objectives of this legislation are to broaden each board's pool of experience and to increase the accountability of decisions made by directors, particularly in relation to conflicts of interest. If these are the true aims of the legislation, they could best be achieved in other ways. APRA's existing powers currently allow them to amend the fit and proper prudential standards already in place to achieve a greater pool of experience. Similarly, there is a robust conflicts management framework already in operation through the combination of the SI(S) Act and the existing prudential standards. There is no evidence that the current framework is failing the members of not-for-profit superannuation funds.

Similarly, there is no evidence that these proposed changes will in any way improve outcomes for members. It is clear that the proposed changes will increase costs to members, with no discernible gain. The fundamental structural changes that the bill proposes may in fact impede the efficient operation of superannuation funds and increase rather than reduce risk. It appears to be a solution in search of a problem. Accordingly, we caution committee members against supporting this bill. Thank you. We are willing to take any questions.

CHAIR: Thank you, Mr Garcia. Mr Cerche?

Mr Cerche : I am amazed, Chair, that I sit here today agreeing with the ACTU and AIST. I have represented the Corporate Superannuation Association for 25 years and our membership consists largely of employer sponsored not-for-profit superannuation funds which are not public offer. We think that these measures are ill fitted for the purpose for which they are ostensibly designed. We also think that they will increase costs disproportionately and significantly so far as corporate funds are concerned, without any benefit to the corporate funds themselves.

At the moment corporate funds have the capacity to and do appoint independent directors to fill skill gaps. They can apply to APRA and get leave to have more than one if they choose to do so, and they do occasionally. But at the moment we believe that our model produces by far the best returns to members in Australia. The only challenge to our model is increased cost. This will represent a significantly increased cost on the relatively smaller funds that my friends represent.

We act for 25 funds. We control $65 billion worth of assets. We have seven million members and we produce consistently better returns than either the industry fund model or the retail model. The industry fund model produces significantly better returns than the retail model, and we outperform them consistently.

The challenge to us is to continue to exist where increased cost and disproportionate levies are forced on smaller funds, as opposed to the large funds. The method of capturing the cost of APRA, ASIC and SCT is biased against smaller funds with larger account balances, and we suffer from that cost tension, which is making us less advantageous than the industry model that we see here. But I am flabbergasted to say that I support substantially the submissions that you have heard. I would be glad to engage with you if you wish to challenge me on that.

CHAIR: I am sure you will hear from a number of senators.

Senator KETTER: Mr Cerche, you mentioned that your organisation represents 25 corporate funds.

Mr Cerche : There are a couple of industry funds with defined benefit membership within that coterie.

Senator KETTER: I think you mentioned that these were not public offer.

Mr Cerche : One is public offer; the rest are not.

Senator KETTER: I do not want to put words in your mouth, but would you describe this bill as using a sledgehammer to crack a peanut?

Mr Cerche : There is obviously a view somewhere that the control that unions exert over industry funds must be mitigated in some way. We are collateral damage to that view. As to whether that view is correct or not, I do not know whether there is evidence to support it. But my general view is that, so far as we are concerned, it is a statutory impost which will increase our costs and therefore reduce the returns to our members. There is no evidence at all, so far as the corporate funds are concerned, that there have been any issues regarding governance. There have been a couple of little funds that have been poorly managed and run, but there have been no losses that we have seen in the retail sector. Indeed, my friends here represent a body of funds that have successfully avoided significant issues in that regard. There is no evidence at all that independent directors help the performance of superannuation funds, in my opinion.

Senator KETTER: The definition of independence in the bill goes to the relationships rather than the particular skills of the directors.

Mr Cerche : Correct.

Senator KETTER: Would you like to elaborate on that issue?

Mr Cerche : The definition in the bill is curious, I must say. It talks about people having a connection with the RSE, the trustee, and it talks about them being in a position to be involved in a body that has an appointing power. Everybody else is independent. So the class excluded from the definition of independent is quite narrow. I do not see, if there is a desire to reduce the influence of unions on the trustee boards, how this will achieve it. I cannot see it at all. All I can see is it being enhanced by people who are more vulnerable than executives of unions, but that is a personal view.

Senator KETTER: You have mentioned the alleged desire to reduce the influence of unions a couple of times. Would you see the argument for that as an ideological one or one that is based on evidence?

Mr Cerche : From where I sit, it is ideological. The evidence is not there. I cannot give evidence of this, but there is a suggestion that the regulator is concerned with the appointment processes in some industry funds and the fact that the regulator cannot convince those funds to change their processes or change their personnel. That should be capable of being dealt with by standards and by setting out proper frameworks, which all funds must have. So it is perceived to be an issue, but there is no evidence of it in my opinion.

Senator KETTER: Mr Garcia, I am interested in that part of your submission which talks about the international recognition of equal representation. It seems to me that, with this bill, we in Australia are moving in a direction which is contrary to what would seem to be best practice in other jurisdictions. I note that you point out that of the 10 countries rated highest for pension governance in the 2014 Melbourne Mercer Global Pension Index, seven countries have pension funds with an equal representation governance model. Are you concerned that this bill is taking us in a direction which is contrary to what is happening internationally in terms of best practice?

Mr Garcia : Yes, we are. Firstly, we are probably the leading country in defined contribution systems; many other systems are defined benefit. Many countries overseas look at the Australian system with some envy and say, 'How can we have a system like Australia's?' Equal representation is firmly part of the system that we have now and has been a key component of our performance for not-for-profit funds. Many other pension funds and jurisdictions overseas look to copy what Australia has. Equal representation is one of those parts. Many other jurisdictions have it legislated as we do currently, and we would see a departure from that as a step away from where the direction should be. Member representation should be maintained on pension funds, as it is their money. It is a trust structure.

Senator KETTER: Could you tell us a little bit more about the Melbourne Mercer Global Pension Index integrity score. What is it, and how does governance impact on that?

Mr Garcia : I might ask Eva to answer that, because she did the research on it.

Ms Scheerlinck : The Melbourne Mercer Global Pension Index looks at three particular indicators: the first is around sustainability of the pension system, another is the adequacy of the system and integrity is the last of those factors. Each of the 25 countries that is considered is measured against various questions under each of those indicators. In integrity, there is no question that is asked of the pension systems in each of those 25 countries as to how many independent directors are on those boards. It really is about: is there a sound—

Senator KETTER: Sorry, just let me understand that: Mercer has determined that asking that question about the number of independent directors is not relevant to the issue of integrity?

Ms Scheerlinck : They have determined that it is not a relevant consideration for them in looking at the integrity of the system. They look at whether or not there is a strong regulatory framework. Since the APRA prudential standards were introduced and there was a revision of the SI(S) Act in 2013 Australia has been scoring incredibly highly against that indicator. Another factor is whether there is an independent complaints body, which Australia has in both the Superannuation Complaints Tribunal and, where appropriate, the Financial Ombudsman Service.

Senator KETTER: Would you mind elaborating on how these representative models have been successful in other jurisdictions.

Ms Scheerlinck : I am not sure that I can.

Mr Cerche : They are being copied. Our system is being considered, to my knowledge, in Thailand and the People's Republic of China and looked at in Germany and Belgium.

Ms Scheerlinck : Aside from what is in the Melbourne Mercer Global Pension Index, I am not sure. I have not done any separate research to that to look at the operation and success of those models or those pension systems. One of the deterrents for that has been that there are different languages in each of those countries, and some of the research is not that easy to translate into English.

Mr Garcia : If I may, the comparison of systems between jurisdictions is extremely difficult, and this is where this Mercer index is extremely valuable. Since there are three separate pillars to this index—one being adequacy and one being sustainability, on top of integrity—the fact that these member based and equal representative systems are seven out of the top 10 is an indication that that system is extremely strong in delivering across those pillars. Sustainability and adequacy are, obviously, very important from a governmental point of view, because how much is it costing us and is it going to deliver the right outcomes we want for the people in the country?

Senator KETTER: If I understand what you have said in your submission correctly, the countries with member representation on boards basically get a score of around 76 out of 100; whereas those without member representation requirements are on a score of about 63. Would you say that is a significant difference?

Mr Garcia : I would think so. It is making a difference to the outcomes for the members of those funds.

Senator KETTER: I think you said earlier in your opening statement, of the membership of your organisation, you have nearly 600 trustee directors.

Mr Garcia : Yes.

Senator KETTER: Can you just elaborate on what number of those would be considered as being independent?

Mr Garcia : Under the current definition, it would be over 60—10 per cent.

Senator KETTER: Ten per cent. And I think you have said nearly 100 employee unions and employer groups are involved in nominating all electing directors. Is that correct?

Mr Garcia : That is right, yes. It varies on the constitution of each particular fund: which nominating organisations are part of that fund; whether it is a government, a corporate fund or an industry fund; and whether they are elected or not elected. There are very, very different models across the superannuation industry. One of the things we take issue with with this legislation is it trying to foist a one-size-fits-all system across what is already a diverse superannuation system, with a very strong prudential framework sitting over the top of it, looked over by the prudential regulator. We are worried about why we need to have a one-size-fits-all system. We believe in a more flexible approach.

Senator KETTER: I am just interested—if you could elaborate a bit more—about the cost which this change might have. You talk about, in your submission, that disruption comes at a cost. Could you just perhaps give us a bit more detail about that.

Mr Garcia : Again, I may go to Eva to answer this.

Ms Scheerlinck : There are a number of different costs associated, in the first instance, with the recruitment of new directors. This being a different pool of directors that would need to be sourced, there would be different models. Whether or not that involves advertising using external requirement agencies, for example, there are obviously costs associated with that. Our research indicates that that would be approximately $40,000 per independent director and up to $100,000 for a chair, despite the fact that in our industry many of the directors are paid, on average, $60,000 per annum. So the search cost is with it using external recruiters at that level.

Then there are obviously training costs that are associated with inducting new directors, regardless of what their individual skill set might be—they might be experts in a variety of different areas; it could be audit or investment. It does not necessarily mean that they know anything about Australia's superannuation system and how that works, or they may never have sat on a board before either. So governance training and specific superannuation training would come at a cost of probably around $15,000 in the first year and then obviously on an ongoing basis.

Other concerns that we have with the increased costs is that, particularly when you are looking for a whole suite of new directors all at the same time, it provides a competitive environment for people to be asked their price, if you like, which will push up the cost of directors' fees. Our position is very much that everyone on the board, regardless of whether they are an independent director or a representative director, has the some duties and obligations and faces the same liabilities. Therefore, they should all be paid the same amount of money for fulfilling those duties. So it will push up not the cost of the minimum one-third independent directors but the cost of everyone on the board, and that will be quite significant. We suspect too, that in administering this new regime, APRA will probably be looking for additional resources and those costs will then also be pushed onto the industry to increase the levy. That is just a snapshot of some of the costs that we have identified.

Mr Garcia : And potential legal costs for the modification of trust deeds.

Ms Scheerlinck : Trust deeds and constitutions, that is right.

Senator KETTER: But that will not come cheaply?

Mr Garcia : No, and what we understand from the lawyers that we have spoken to is because of the way the transition is occurring—or is proposed to occur over a three-year period—these trust deeds will have to be changed on multiple occasions to allow the performance of the fund to adapt. As you are allowed to bring independents on under the proposed laws, they are going to have to adapt the trust deeds as they go along, so there will be multiple changes to all funds' trust deeds.

Senator KETTER: I think in your submission, in terms of the definition of independents you talk about it being too narrow; can you just elaborate on your concerns about the proposed definition of independent?

Ms Scheerlinck : It seems to be divided into two separate sections. One relates to the ownership of the RSE licensee and then the second part is about the relationships that exist. Some of the concerns we have are about how narrow the definition is and the unintended consequences of some of the people that might be caught. The requirement at section 87(1)(d) is about people who have, in the previous three years, had a business relationship with the RSE licensee—for example, any of our member funds would have had a business relationship with AIST. We provide them with membership services and training, and in some cases we do audits on their staff for their ongoing regulatory compliance—et cetera. That is an ongoing business relationship. Any of the directors in our organisation who are then also a director on a superannuation fund would not be able to be independent directors because of that business relationship that they have with the industry body—for example. We think that is quite a farcical outcome.

Senator KETTER: That is extraordinary.

Ms Scheerlinck : For example, Nicolette Rubinsztein, who was just recently appointed to the board of UniSuper as an independent director, has a very strong CV in terms of technical skills in investment area and has long and very significant experience. She has been appointed as an independent director but she has served on the board of ASFA for the previous eight years. If this bill comes into operation she would no longer be independent under the definition as it currently stands. If you look at subparagraph (f)(i)—looking at a large employers, for example—the definition of large employer currently in the act is for 500 employees being members of the fund. In that scenario there is no proportionality with the size of the fund, so 500 employees from one employer in some funds may not happen all that often. But in a fund like AustralianSuper—for example, who have 210,000 contributing employers—it would be very hard to keep track of how many of those employers might have 500 members within the fund at any one particular time. Not only that, if you look at how that restricts the pool of potential candidates, all of a sudden you have got 210,000 employers out there who might have people working within them or on their boards who have extraordinary skills and who could add value to the board of AustralianSuper, but those people would no longer be eligible under this current definition as is drafted to be independent directors on AustralianSuper.

Senator BUSHBY: Thank you for assisting us today. In your opening statement, you noted that you opposed the reach and the drafting of the bill. You then said you opposed the abolition of equal representation. I would contend to you that the bill does not abolish equal representation. It certainly abolishes a legal requirement in certain funds that there is equal representation but it leaves the door wide open to funds to continue that model with a minimum of one-third independent directors. What would you say to that? Why can't a fund just discontinue equal representation but also have a group of independent directors on the board?

Mr Garcia : What we also stated in our opening statement was they are not mutually exclusive and that seems to be a position that is coming through. It is either independent or its equal rep but they can actually work together.

Senator BUSHBY: I understand your point about flexibility.

Mr Garcia : Our position has been up to one-third independents and it has been from the outset since Cooper. So maintain the equal representation because we believe that model works for the not-for-profit sector. We are not saying the retail has to be the same as us, we are not saying that anyone else has to be the same as us and we do not believe that one size should fit all. But for not-for-profit, maintain the equal rep and change the SIS Act because there is a limitation at the moment that you can only have one independent director unless you go to APRA to seek more independents. Give them the opportunity to have flexibility on the board because what we are trying to determine here are better skills when it comes down to it. So if a board determines it believes it needs better skills in this area then it needs the ability to bring someone on, and that has been our position from the outset. I think the debate has gone around that you are one or the other. We believe that you can be both but we think it is important that equal representation is maintained in legislation. That is the way that many global systems are going and we do not want to move away from that.

Senator BUSHBY: I understand your arguments about flexibility but really what I was raising there was your statement that you opposed the abolition of equal representation. At the end of your opening statement, you pointed out that you want it maintained in legislation.

Mr Garcia : Yes.

Senator BUSHBY: But it still did not address my question of how this bill actually abolishes it because it still allows that and it actually provides additional flexibility—to use the terms you are using—for a fund, after this is enacted if it is, to decide to maintain that equal representation with the two-thirds that are not required to be independent directors or to do something different if that board in particular thinks that it is in the interests of members to do so. Certainly if the board decides it wants to maintain that equal representation, it can. On that basis, it abolishes a legislative requirement for it but it does not abolish equal representation.

Mr Garcia : The presumption there is that it will be maintained in the trust deed. From what we understand, our members will maintain it if this government legislation goes through.

Senator BUSHBY: Which I would expect it will.

Mr Garcia : But we do not see why that avenue needs to be taken to increase the skills and increase the outcomes of members. The prism has been changed. The focus should be independents and then everything wraps around that whereas we see that the model that we have had has been about equal representation. We have delivered very good outcomes for members. It has been working in collaboration with the two-thirds rule sitting over the top of that to make sure that the decisions are collaborative and then if we need extra skills and we want to improve the board performance, we are given the flexibility to add independents to that. I guess it is a different prism of looking at it.

Senator BUSHBY: It is a different prism. In one case you were arguing against a restrictive approach to independent directors but in favour of a prescriptive approach for equal representation. On the basis of your argument against a prescriptive approach, maybe you should be arguing for no prescriptive approach for independent directors but no prescriptive approach for equal representation as well and then each board can make its own decision as to how many independent directors or the extent to which they maintain equal representation. It is probably an unfair question because it is not a new submission. But listening to your argument to justify where you are coming from, it seems to work equally for both sides.

Mr Garcia : The basis of this is about flexibility and what governance model will best suit each system. At the moment, we are trying to put a one-size-fits-all model across the entire industry. We do not think that that is the right solution.

Senator BUSHBY: I want to ask you a couple more questions. One of the things that APRA tells us is the reason it wants this change is it brings consistency across all APRA regulated entities. Obviously, they think that, inherently, independent directors on boards add to the overall quality of governance. We will ask them about that later. I note that your evidence, Mr Cerche, is that it does not necessarily particularly do so. I will ask you a question about that in a minute. But APRA's view is that bringing that consistency is a good thing. You obviously disagree with that.

Mr Garcia : We do, because they are different structures. One of the issues we have is that APRA is looking at banking, insurance and super. It has only recently started prudentially regulating super—two years ago. Banking and insurance are corporate entities and, therefore, sit under the ASX guidelines for independence. Superannuation entities are trusts; they are fundamentally different structures. For APRA to say that they all should look the same and they should all be the same is incorrect. We have made that point in another Senate committee about APRA as well: there should not be this consistency, that a bank should be the same as a super fund should be the same as a life insurer. There needs to be the ability to recognise that they are doing different things, they make different promises to their stakeholders and they are completely different entities.

Senator BUSHBY: They are, absolutely, completely different in terms of corporate structures, but the reason the Australian Prudential Regulation Authority oversees all of them is because the consistent common thread is that those organisations are responsible for other people's money. That is why they are prudentially regulated., and that is why there are the consistencies.

Mr Garcia : Absolutely. We are certainly not disagreeing that they should be prudentially regulated.

Senator BUSHBY: APRA is the regulator, and, despite the different nature of the organisations that are looking after other people's money, I anticipate their argument will be that it is because of that aspect of looking after other people's money that they want this model of governance.

Mr Garcia : Certainly. I guess this is where the debate has been sitting for a while. In the ASX listed companies, in corporate entities, it is independent of management. Every single director in a not-for-profit fund is independent of management. They are not management; they are independent. Under the definition of 'corporate', they are all independent. All 600 are independent. The definition in the ASX guidelines—and I am on the council for the ASX—is that they are independent of management, and that is what the majority is. In banking, they are independent of management; in life insurance, they are independent of management; in super, they are all independent of management. What this is determining is that different definition around how they are nominated. But we are actually trying to look at conflicts, skills and fitness and propriety. APRA has the prudential standards to do it right now. We have had two years of it, and we are implementing it.

Senator BUSHBY: We heard some alternative views on Friday in Sydney, which I will not go through now. When we hear from APRA this afternoon, I will test some of those things that you are raising with them. You asked some questions about how the costs will be increased, and I was going to do the same thing. You noted a couple of things such as: recruitment, training, costs of the directors' fees, increased costs through APRA and the legal costs of updating trust deeds. In terms of recruitment, how often, on average, do funds change directors?

Mr Garcia : I do not have an answer that would—

Senator BUSHBY: Is that something you could take on notice and provide us?

Mr Cerche : With the APRA requirements, you have terms and the terms are renewed or not renewed. In the industry model, typically there is a nomination by a union which often results in the same person being appointed. In my model, there are universal elections and people stand and are elected by the membership, and they change regularly. In our model, we do not typically pay directors' fees.

Senator BUSHBY: I was going to come to you with a couple of specific questions. I will follow that up in a minute. I will finish up with AIST, and I was going to ask you about that. Presumably the training fees will apply to any new director. Any new director, whether nominated by an employee or an employer or independent, could still have the same requirements that you outlined.

Ms Scheerlinck : Yes. In relation to your previous question, in the APRA submission to this committee, I think they say that the average board tenure of a super fund board is 6.7 years. I do not know whether or not that helps with your question, but the not-for-profit model and the equal representation model do not necessarily have those recruitment costs, because they worked very closely together with their sponsoring organisations.

Senator BUSHBY: I understand that. There may be some contention about the actual figures that you quoted, but I suspect you are probably right that, if an employee association nominates a director, it is probably a much simpler process than going and sourcing independents. I do not disagree that there would be additional costs through recruitment. You are probably going to have training costs for any new director.

Mr Garcia : Yes, we would agree. If this goes through with the transition that we are talking about, there will be a spike in the requirements of training for funds.

Senator BUSHBY: Potentially so. I am not arguing that there will not be some up-front costs as part of this change, and there is a three-year transition period to try to absorb that. You said the cost of directors' fees may go up. That is possibly arguable, but you can only really find out when it happens. There may well be a lot of people who would be keen to be directors on superannuation funds and do not have the opportunity at the moment. I do not know. We will have to see. I am interested in why you say there would be a continuous need to adapt and update the trust deeds. I would have thought that, if the bill went through, a fund would need to have a look at its constitution to ensure that it complies. It would probably need to make a threshold decision as to whether to enshrine in the constitution equal representation for the remaining two-thirds, which I imagine most would. Once you have done that, why would you need to continue to change?

Mr Garcia : It is our understanding from lawyers that we have spoken to that because of the way the transition is, and depending on how the transition will occur in terms of the numbers of employee- and employer-nominated directors and independents, how they come on and how that mix gets to the final outcome, it may require the deeds to be constantly tweaked so that the deed reflects the legislation.

Senator BUSHBY: So you saying that, if you have a board of nine directors and you are trying to progress that to three of those being independent, you would have to change it as each one came on?

Mr Garcia : Yes, depending on the trustee.

Senator BUSHBY: You probably need some smarter lawyers, I suspect.

Ms Scheerlinck : Potentially, but obviously the appointment powers come through the constitution, so if that power does not exist now, even though the bill suggests that you can have a breather from breaching the act, if you like, you still need to have the powers to be able to make those appointments while you are going through the transition period. In a fund, for example, like HESTA, who I think has 21 sponsoring organisations, there is a lot of negotiation that is going to need to be done about how those appointments are made and who will have the appointment rights.

Senator BUSHBY: There are some of those issues with how you deal with the existing board directors. I am going to quickly ask Mr Cerche some questions. What are your current board structures? How do they work in the corporate sector?

Mr Cerche : Typically they are corporations. They are required to have rules relating to the appointment of member representative directors.

Senator BUSHBY: Are they all equal representation?

Mr Cerche : Yes, they are all equal representation, and you can elect to be a standard employer-sponsored fund and have an independent trustee, and some have. Some have outsourced their super funds to the professional trustee industry because of the cost of meeting all the compliance issues. But it is hard to generalise, because we have outliers. Most of our funds comply strictly with the equal representation model.

Senator BUSHBY: Is that by choice?

Mr Cerche : By choice. You have to comply with one or the other. The law basically says for a representation, 'This is what you have to do and here is how you vary it.' We are in that space.

Typically, our members are all members of the one employer group. They elect their members from their coterie. Those directors come onto the board and they are trained. They do not take a fee, hence there is no cost for them. But the employer makes them available, gives them time off and does not prejudice them in any way—they are not allowed to victimise them. All those sorts of rules are in play, and off they go.

The employer side is sometimes more complex, typically now that the finance directors and the managing directors do not want to be on the funds—a la Andy Penn's situation. They have senior executives, but otherwise, executives—or in some cases they import skills—as their nominee. In fact, there are a couple of funds that have very distinguished doctors on their boards to assist in the claims process because most of them are internally insured in respect of defined benefit. They are paid a modest fee—it is nothing like what my friends pay. Our estimation, and it is in our submission, is that we think the costs will be significant.

Senator BUSHBY: The list of costs the AIST indicated, are they the costs that you foresee as well?

Mr Cerche : Yes. The AIST funds have $100 billion under management, some of them. We only have $5 billion.

Senator BUSHBY: So it is like small businesses, red tape and the bigger impost before—

Mr Cerche : Absolutely.

Senator BUSHBY: It is a similar parallel here.

Mr Cerche : In relation to that, I point out that when the FSI made their recommendations they specifically mentioned that my coterie should not be included within the governance changes that it recommended.

Senator BUSHBY: You said there is no evidence that independent directors help performance of superannuation funds. I think you agreed in response to a question from Senator Ketter that you suspected the change was being driven more by ideological reasons. As I have already raised, APRA, United Murray, Cooper and other consumer organisations disagree. It is clearly contentious—there are a lot of other people whose view is that there are advantages—

Mr Cerche : Superannuation is about performance. In the end, you assess or judge the success of the superannuation industry by the outcomes for members. It is very clear to me that the mutual model produces a better outcome than the retail model. You have to ask, 'Why?' In the middle of a corporate—a retail—model, is a trustee, which has independent directors and has executive members of the financial institution. A majority are independent. They are all good people, but they cannot change what they have. They have a captive administrator, a captive custodian, a captive financial services group and a captive investment platform group. They can tinker—they can tinker or do what they like—but they cannot change it. And the performance is not there.

Senator BUSHBY: But that is pointing at other sectors and how they have performed—

Mr Cerche : I am trying to explain to you why—

Senator BUSHBY: And independent directors are a relatively recent phenomenon in retail—

Mr Cerche : No, not at all.

Senator BUSHBY: The requirement to have a minimum number is.

Mr Cerche : No, with respect, an independent trustee has to have a majority of independent directors under SIS at the moment. The basic equal representation rule applies to those who elect not to have an independent trustee. The default position is that you have to have an independent trustee unless you comply with the basic equal representation rules. Our model is that. The retail is exclusively an independent trustee with a majority of independents sitting on that little body in the middle of a financial institution.

Senator BUSHBY: I have another question for AIST, and it was also mentioned by the ACTU. You say in your submission that real conflict is ignored as part of it, and you note that there were recent and numerous financial planning scandals involving bank parent companies of for-profit superannuation funds. Have there been any scandals in retail superannuation funds themselves?

Mr Garcia : Not that I am aware of. It has been around the financial institution that is the parent company.

Senator BUSHBY: I think that is probably an unfair comparison. There has been no shortage of scandal surrounding parent unions of industry funds but in my view that does not reflect at all on the management of industry superannuation funds, and I would not try and draw that parallel. I think it is probably unfair to draw a parallel between scandals between organisations that are parent to other funds if there are not any scandals or if those scandals do not impact on those funds.

Ms Scheerlinck : The only point I would make in relation to that is that there are independent directors on those boards, and the scandals have happened regardless.

CHAIR: I do thank you, Mr Cerche, Ms Scheerlink and Mr Garcia for your evidence here this morning. We appreciate that.