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Superannuation industry admits problems with the complexity of investment and disclosure rules, and that there are risks when dealing with some operators

JIM WALEY: This morning, the issue that's quietly reshaping the economic and social structure of Australia - superannuation, all $600 billion of it, but with such a cascade of money, the industry admits problems with investment and disclosure rules and the financial risks of dealing with some operators.

MICHAEL MEAGHER: Debacles, like Occidental and the West Australian Company don't surprise John Evans, an experienced actuary and consultant to the industry. He believes that action should have been taken earlier on Occidental.

Are there any other companies you think have the same profile as Occidental Regal?

JOHN EVANS: Yes, but I'm not prepared to name them.

MICHAEL MEAGHER: What - one, two, three?

JOHN EVANS: Two or three that I would know of, yes.

MICHAEL MEAGHER: So should we be alarmed?


JIM WALEY: Part of our extended cover story on the superannuation industry to be reported by Michael Meagher. We'll also be talking to the man charged with supervising the industry, Insurance and Superannuation Commissioner, Richard Beetham.

Now, to what's emerging as the financial issue of the decade - superannuation. When the Occidental and Regal insurance companies toppled last year, thousands of investors discovered that superannuation was not quite the trouble-free avenue of providing for their future. The incident underlined not only concerns about the way super money is invested, but also the level of disclosure to fund members and the performance of managers and trustees, all the more important because hundreds of billions of dollars will be collected this decade, a proverbial honey-pot which could witness rorts and failures along the way. Michael Meagher has this report.

MICHAEL MEAGHER: When we line up for work each morning, it's hard to look past today and the next pay-packet. Most of us are not good at providing for life in retirement, but, for the reluctant, the Government has made retirement and superannuation savings the responsibility of us all. We are, of course, catering for an ageing population. There'll be 2.4 million people over the age of 65 by the year 2,000. Two institutions, the AMP Society and its bitter rival, the National Mutual, will lay claim to about a fifth of the promised super savings pool.

RAY GREENSHIELDS: I think the projection of 600 billion in the year 2000 for superannuation funds is not unrealistic. By the time we get to the year 2000, there'll be something like $700 or $800 billion in superannuation funds.

MICHAEL MEAGHER: The superannuation is an investment bonanza. Now, there are going to be some good managers and some bad ones; there'll be some astute financial decisions made and some poor ones. Most of the managers and trustees will be scrupulous but, inevitably, with so much money involved, some will be unscrupulous. What the members want to be assured of is that, at the end of the day, lies a healthy lump sum or annuity. After all, it's their entitlement. They want to know is their super safe.

JOHN EVANS: Safe means the probability, I think, of having money at the other end when you go to retire. Depending upon the period you've got to go, I'd have to say some of it is not very safe at all. It's probably very badly invested in terms of the asset mix, et cetera.

BILL JOCELYN: In total, superannuation is safe, but around the edges, individuals are going to get ripped off unless there are changes, and there looks as though there could be scope for an individual fund to be subject to fraud or something of the sort, and for individuals to remain unprotected, and that worries me.

PAUL KEATING: Under our conservative opponents, the Liberals, people never had to worry about whether it was safe, they just didn't have it.

MICHAEL MEAGHER: At the first national super get-together, the Conference of Major Superannuation Funds in Wollongong, the keynote speaker was Treasurer Keating, the man most responsible for turning super into a social policy for everybody.

PAUL KEATING: But we've actually now got some people here that actually know someone else in the work force.

MICHAEL MEAGHER: But there was a serious message, aimed at keeping the juggernaut under control.

PAUL KEATING: It is a matter of such importance that the Government has decided to review the prudential controls on superannuation, not just superannuation funds themselves, but including roll-over funds, funds managers, pool superannuation trusts and the whole area entrusted with superannuation savings.

MICHAEL MEAGHER: But thousands of Occidental and Regal policy holders seem to be caught up in the financial troubles of another leading businessman.

Last year's collapse of Occidental and Regal, dispensers of both life and super products, heightened fears about the industry - the group's potential asset deficiency could be as high as $240 million. Fellow insurers are reluctantly working on a support package, while Occidental and Regal super members face a crisis.

DAVID AUSTIN: All our funds are frozen. We have no funds that we can put our hands on at the moment. They are all with Occidental and it could be two years - who knows how long before we can get some funds. We don't know how much, what percentage of the total funds we'll get back.

MICHAEL MEAGHER: David Austin, General Manager of Sydney-based fabric processor, Shaw of Australia, hired Occidental 14 months ago to manage his company's super scheme.

DAVID AUSTIN: Basically I blame, overall, the Insurance and Superannuation Commission. I feel that they're the watch-dogs for the Government and they should have more control over it. There seems to be no control on who owns the funds, how they're administered, what the investments are, so we've got ourselves into this state because there's been no overriding body that controls these people.

MICHAEL MEAGHER: And the problems of David Austin and his colleagues are not unique. It appears that other fund members are at risk from rorts and other dodgy dealings involving super, as conference delegates heard last week.

MARTIN FERGUSON: There's a recent case in Western Australia, which has come to mind in the last couple of days, by which we have found an employer who's not only failed to pay on time, on a number of occasions, but also milked the scheme to ensure that they sought to maintain the financial viability of their company. Unfortunately, that superannuation scheme is now in difficulties, and that company is in difficulties. There is an obligation on the union movement, in association with employers and the Industrial Relations Commission, to ensure that that does not occur in the future.

MICHAEL MEAGHER: Industrial Relations Minister, Senator Peter Cook.

PETER COOK: Well, a number of the beneficiaries - the workers in that company - have approached me saying that they can't get a return from the liquidator of their share of the funds because the funds are regarded as part of the company's assets. Now, this seems to me to be a very odd set of circumstances. Certainly, workers on whom superannuation fund benefits have been paid, in the event of that fund falling over, ought to be entitled to recovery of their own benefits.

So I'm having a good look at that case to see what is the law of it, and, if there is a need for legislation, that's a matter I'll discuss with my colleague Ministers. But in any case, there is a matter here of elementary justice: the right and entitlement of people who have made a provision for their superannuation, finding that that superannuation provision is lost to them because of the mismanagement of a company fund.

ANDREW FAIRLEY: I believe that what ought to happen is the implementation of some legislation to require an insolvency practitioner, upon appointment to an employer which has a superannuation fund - I think there's an obligation on that person to appoint an independent trustee immediately. It's what's happened in the UK, and it's happened for very good reason. I suspect that there's going to be a number of companies, in the near future, that are going into receivership if they haven't already, and the problem exists of members being - their benefits being dealt with in a way which is inequitable, and that's not right.

MICHAEL MEAGHER: Debacles like Occidental and the West Australian Company don't surprise John Evans, an experienced actuary and consultant to the industry. He believes that action should have been taken earlier on Occidental.

JOHN EVANS: The Life Insurance Act provides, very clearly, that in the case of an expense overrun - in other words, expenses are much larger than the allowance in the premiums you are getting in - if there's an extreme overrun, the Deputy Commissioner Life, now, does have the power to effectively close that company down. It's a very clear provision as opposed to the other sections that says: we don't like the way you're doing it so, therefore, we're going to close you down. That's a difficult section and I accept that.

MICHAEL MEAGHER: Are there any other companies you think have the same profile as Occidental Regal?

JOHN EVANS: Yes, but I'm not prepared to name them.

MICHAEL MEAGHER: What - one, two, three?

JOHN EVANS: Two or three that I would know of, yes.

MICHAEL MEAGHER: So should we be alarmed?

JOHN EVANS: Yes, because, in my view, the regulation probably has the information to close them down, but it just isn't coming in as hard, perhaps, as it should.

MICHAEL MEAGHER: Moves by the regulators to tighten prudential standards won't be made easier by highly competitive, growth-oriented institutions, power brokers whose funds own many of the buildings in which their clients work. But some of them have chased new business, particularly capital-guaranteed products, at the expense of reserves. Ken Lockery of TPFC.

KEN LOCKERY: When an insurance company gets its reserves down perhaps very close to those minimum levels, it has only two choices really. One is to lower its return substantially, to investors - in which case investors pull out and the insurance company will not get any new business and so that's not a viable option for it - or the other is to merge into another organisation or with another organisation where the reserve levels are more substantial.

MICHAEL MEAGHER: So this is what happened to Capita?

KEN LOCKERY: That, as my understanding, is basically the underlying basis for the MLC Capita merger. I think there needs to be more disclosure to people, generally, about what reserve levels are held, how that fits in with the investment policy, and how those reserving levels compare to the reserving levels required under the rules set down by the Insurance and Superannuation Commission.

JIM WALEY: The first part of our report on superannuation. When we return, Michael Meagher will examine some doubtful investment practices and gaps in the regulatory net.

MICHAEL MEAGHER: Part of the joy of being a child is that unless one of your parents is an actuary, no one has attempted to explain superannuation to you, but it doesn't get any easier as you grow older. Some idea of how confusing superannuation can be is gleaned by asking Bill Jocelyn, Managing Director of the New South Wales GIO, a man with more than 20 years experience in insurance, about his own super.

BILL JOCELYN: Well, I'm a member of the State Superannuation Fund and I've been trying to understand that recently, actually, and certainly I find it's pretty complex and I had to ask some of our own investment planning people to explain our own plan to me. That's how much things seem to have become more complex in the last 20 years.

MICHAEL MEAGHER: What chance has the man on the street got?

BILL JOCELYN: I don't think he's got any chance at all. He's just got to run with the last insurance salesman he spoke to, and there's got to be something wrong with that.

MICHAEL MEAGHER: Lawyers like Andrew Fairley have to wade through the morass of super legislation.

ANDREW FAIRLEY: The regulation of superannuation is immensely complex. There's been a lot of grandfathering going on where you have things that operate from particular dates. Now, to have grandfathering, it means that you introduce, necessarily, a level of complexity which is beyond the capacity of most people to understand, and what it's meant is that the legal profession, the accounting profession and the superannuation consultants are more and more required to be providing interpretative services to trustees. Now, that's terrific if you're a member of the legal profession or the accounting profession or you're a superannuation consultant, but at the end of the day, it's the member that's paying for that advice.

MICHAEL MEAGHER: At last week's super conference, the call was for simplification, while industry exhibitors touted sophisticated tools to make investment easier. This conference is as much about selling products as it is about providing information. You want it - they've got it. Everybody's after your business. Institutional investment management, bank financial services - each with their own version of the latest capital-guaranteed product and computer software solutions. Now, all these products are aimed at the trustee. The question is: are our trustees ready to make such momentous financial decisions?

Bearing in mind that Australia's eight million or so workers are covered by more than 100,000 funds, all with individual trustees, the role of those trustees becomes vital. Libby Slater of Mallesons.

LIBBY SLATER: The role of the trustee is to invest the money that's placed with it for the purposes of the superannuation plan, and to prudently manage that investment so that it achieves a reasonable balance of return against risk, and to apply the money that's available from that investment to pay the benefits that are due to members.

MICHAEL MEAGHER: And what becomes paramount are the vetting procedures used for choosing a board of trustees.

But I can be a bankrupt; could I have a criminal record?

LIBBY SLATER: Well, I don't think anybody would appoint you if you did.


LIBBY SLATER: Yes. Theoretically you could.

MICHAEL MEAGHER: At the conference, attention was focused on the growth of industry funds and the need for trustees to be reminded of their dire responsibilities. Geoffrey Cook, Telecom Super.

GEOFFREY COOK: We've only got to look, as I do in Victoria all too often, at what's happened with the VEDC, the National Safety Council and Tricontinental, and certainly we all read the paper with a great deal of interest. Certainly, there have been some rogues and scoundrels involved, but also, if you look at many of the other directors who were there, they were highly experienced and very well-qualified. So if it can happen to them, I venture to say, it can happen to me, it can happen to you.

MICHAEL MEAGHER: The Liquor Trades Union's Linda Rubinstein.

LINDA RUBINSTEIN: But I think that it is on that question of that accountability and the question of understanding who the money belongs to and who has the rights over the money that distinguishes this new brand of trustee from the old one.

MICHAEL MEAGHER: And the ACTU's Senior Industrial Officer, Mike McKay, who is a trustee of five industry funds.

Are you worried about your responsibility?

MIKE McKAY: Well, I think about it a lot. One of my duties is to think carefully about every issue that confronts us as a trustee, and sure, I worry about it a lot, but that's part of the job.

MICHAEL MEAGHER: What do you know about making investment decisions?

MIKE McKAY: I know that you must go and get professional advice and you must invest with reputable managers like AMP and BT and so on.

MICHAEL MEAGHER: One of those investment advisers is the top performing BT Australia. Director, Mike Crivelli, has some reservations about how industry funds will be invested.

MIKE CRIVELLI: I think our concerns are that because there's very little new money flowing into the other areas - that is, corporate and government - that most of the cash flow - even though it's quite a small percentage in superannuation - is coming from this area, and at the moment because of, I guess, where the membership are coming from, they regard it as deferred pay and they want to see it sort of going up a bit each year. It means there's a great preoccupation with short-term results.

MICHAEL MEAGHER: How do you educate people? How do you get them away from a bank-book mentality?

MIKE CRIVELLI: Well, I'm not a psychologist. I think it's a matter of time. It will take some time and in the meantime I think we're going to have a bit of a hiatus in terms of availability of funds.

MICHAEL MEAGHER: But it's not only the trustees of private sector funds that bear scrutiny. Those in the public sector are also under examination.

DAVID ELSUM: It's my view that the position of trustee of a superannuation fund is far more onerous than being a director of a public company.

MICHAEL MEAGHER: David Elsum is on a super board accused by some of helping out a cash-strapped Victorian Government. He's a member of the State Super Board which has loaned back 45 per cent of its assets to the Government. Trustee obligations are sharply in focus.

DAVID ELSUM: This particular fund is obtaining a 6 per cent real return on investment, which in anyone's terms for sovereign risk, is a highly satisfactory return on investment and one that we're completely comfortable with and one where our members are assured of getting their pensions. And some of the reporting that has been made on this particular issue, we feel, has been irresponsible in worrying people about matters which they shouldn't have to be concerned about.

MICHAEL MEAGHER: So will the profile be changing further? I mean, do you intend to - you are saying that exposure won't go beyond 50 per cent.

DAVID ELSUM: It certainly won't go beyond 50 per cent and I see it, over time, reducing back to a more conventional level which most superannuation funds have, of something like 30 per cent in equities, 30 per cent in fixed interest and 30 per cent in property and 10 per cent in other things.

MICHAEL MEAGHER: The Government's quite happy about that - they can find the money elsewhere?

DAVID ELSUM: I don't know whether the Government's happy about it or not because we are an independent board which make our own investment decisions.

MICHAEL MEAGHER: Most members of the Victorian fund wouldn't have known about the Government investment, just as many of the members of the Elders IXL super funds wouldn't have been aware that tens of millions of their funds were invested in John Elliott's buy-out vehicle, Harlin Holdings. That's a transaction that should have been promptly disclosed to members.

JOHN EVANS: I think that's a matter for trust law, which is certainly not my expertise, but generally, I'd think if there were people in the superannuation fund who were not members of the executive and therefore fully aware of the investments, I wouldn't be too happy about being a trustee of that particular superannuation fund, because you must invest in the interest of all of the members.

BRIAN SCULLIN: The most important thing is that members have to know, a lot more clearly than they do now, where their money is invested, who's looking after it, and why the trustees have chosen to invest in that particular way.

MICHAEL MEAGHER: The industry is facing an uphill battle to force disclosure. The Association of Super Funds' Executive Director, Brian Scullin, oversees more than 100,000 funds. Alarmingly, he says that less than 50 of those 100,000 tell their members, each year, where the money is.

BRIAN SCULLIN: But we think the law ought to be changed so that every fund had to meet certain minimum obligations in terms of telling the members where the money's invested and why it's invested in that way.

MICHAEL MEAGHER: Of course, before you have to deal with issues of disclosure, the money has to be there. Contributions have to be collected, and any company thinking of avoiding the issue - and a worrying number are doing just that - should take note of Martin Ferguson.

MARTIN FERGUSON: And as a result of a unanimous decision of our March executive, the ACTU will be implementing a package, a strategy, which is designed to raise the level of employer compliance, and so far as I am concerned, no industry will be excluded from that integrated program of action by the union movement.

JIM WALEY: The super challenge.

The man charged with overseeing the superannuation and insurance industry is our next guest. Richard Beetham has the task of trying to regulate the many complexities of insurance. This, as Treasurer Keating announced a wide-ranging investigation to identify and resolve the sector's problems and weaknesses. Michael Meagher caught up with Richard Beetham at that super conference in Wollongong.

MICHAEL MEAGHER: Mr Beetham, the Treasurer has just announced a major review of prudential safeguards within superannuation. Where will the focus be?

RICHARD BEETHAM: Essentially, what we will be doing is, in the first instance, addressing some conceptual-type issues, basically, to look at where superannuation fits appropriately in the risk spectrum of savings and investment vehicles. Having dealt with that broad conceptual-type issue, we will then ascertain what are the appropriate prudential requirements consistent with that position of superannuation in the risk spectrum.

MICHAEL MEAGHER: What do you think are the most urgent prudential changes needed?

RICHARD BEETHAM: I am very much a believer in disclosure, and we are putting a great deal of time, energy and resources into improving the disclosure of information by superannuation funds to the members and to the community at large, and I believe that by improved disclosure, that will apply a great deal of pressure on trustees and on fund managers to conduct the affairs of the funds in such a way that will be regarded as appropriately prudential. We, in fact, are in a position where significant disclosure requirements for superannuation funds will be going to the Treasurer in a matter of weeks, and I hope he will be able to announce them shortly thereafter.

In terms of other areas, they will be examined in a review of prudential supervision which is currently being undertaken.

MICHAEL MEAGHER: Should members of the Victorian State Super Fund, for instance, know that 45 per cent of their money is out with the Victorian Government?

RICHARD BEETHAM: Without referring to any specific fund, one of the proposals in the disclosure requirements that we are developing is that members shall be informed where more than 5 per cent of assets of a fund are invested in one particular type of investment organisation or the like, so that by disclosing that information to members, the members are aware of that investment and, to the extent they are concerned with that kind of investment, can take the appropriate action.

MICHAEL MEAGHER: But can it still happen?

RICHARD BEETHAM: Again, this is a question of whether, in the review of prudential supervision, the question of what investment-type restrictions should be applicable, will be addressed.

MICHAEL MEAGHER: Would you like to have more power in using corporations law?

RICHARD BEETHAM: Yes, I would. Essentially, at the moment, we rely on the taxation powers which basically means that for a fund which does not comply with the rules and regulations, we deny the tax concessions to that fund, which, unfortunately, can affect all members, which can be quite a major adverse effect. While there are other powers that I can use under the taxation laws, they are not totally satisfactory to dealing with the different degrees of non-compliance that can eventuate. If we were able - and this is a question that's being examined - if we were able to use the corporations powers to enforce superannuation rules and regulations, I believe it would be possible to be able to effect certain penalties which may be appropriate to the offence which was committed, but which would not have such adverse effects on all members of a particular fund, a spectrum of penalties.

MICHAEL MEAGHER: So you might penalise the trustee or the manager of the fund, rather than the member?

RICHARD BEETHAM: That is possible. We are currently undertaking a series of audits of superannuation funds and we are discovering some examples of non-compliance. I'm not in a position, at the moment, to say that that non-compliance was deliberate and deserving of legal action against trustee, as distinct from inadvertent non-compliance.

MICHAEL MEAGHER: So what have you found with these audits?

RICHARD BEETHAM: We've principally found that in those areas where funds have not complied, the major reason for non-compliance has been contravention of the in-house asset rule which basically places a limit on the moneys which a superannuation fund can invest in the business of the employer or in his related businesses.

MICHAEL MEAGHER: At the moment, that's a 10 per cent limit, isn't it?

RICHARD BEETHAM: That is a 10 per cent limit for those who had more than 10 per cent when the in-house asset rules were introduced. There is a transitional process.

MICHAEL MEAGHER: And how many companies haven't complied with the 10 per cent?

RICHARD BEETHAM: As a product of the audit, we've discovered a handful.

MICHAEL MEAGHER: For an investor in a super fund, if that investment of that fund is operated by a life insurance company, how do I find out how solvent that company is?

RICHARD BEETHAM: It's extremely difficult at the moment, partly because of the absence of sufficient financial information regarding life offices to make those assessments. There are various consulting firms who do seek to make assessments of the relative strength of life offices.

MICHAEL MEAGHER: They even seem to find it impossible themselves.

RICHARD BEETHAM: I agree. It is very difficult. We have put, very high on our agenda, the disclosure of sufficient financial information regarding the position of a life office to allow independence and outside assessments of the relative financial strength of life insurers. That will be done in the context of the review of the Life Insurance Act which is currently under way, a product of which will be more formal solvency requirements and various solvency standards.

MICHAEL MEAGHER: But specifically, how would you like to see capital adequacy or solvency rules tightened?

RICHARD BEETHAM: It would be rather premature of me to pre-empt what will be the result of those review processes, but there's no doubt in my mind that the end product will be a much tighter system of prudential supervision of life insurance companies.

JIM WALEY: Insurance Commissioner, Richard Beetham, with Michael Maher.