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Monday, 27 February 2012
Page: 1974

Mr FLETCHER (Bradfield) (21:12): I have spoken previously in this place about the cosy relationship between the union movement and a certain class of superannuation funds, particularly industry funds and public sector funds. I rise tonight to speak more specifically about the Energy Industries Superannuation Scheme, a public sector scheme in New South Wales, and the cluster of business entities associated with EISS.

EISS is the retirement scheme for people working in the electricity sector in New South Wales and it manages assets worth approximately $3 billion. The assets of EISS include a one-third stake in a company called Chifley Financial Services Ltd and full ownership of another company called FuturePlus Financial Services Pty Ltd. The trustee company of EISS has eight directors. These are the people who exercise control of EISS and its assets. These directors include a range of New South Wales ALP and union movement royalty: Mr Bernie Riordan, secretary of the New South Wales Electrical Trades Union and a former president of the ALP in New South Wales; Mr John Whelan, a former president of Unions NSW; Mr Mick Doust of the ETU; Mr Ian Tarrant of the United Services Union. Mr Riordan and Mr Whelan are also directors of FuturePlus Financial Services and were until recently also directors of Chifley Financial Services.

The Sunday Telegraph reported last year that Mr Riordan was at that point receiving directors' fees from the three entities—EISS, Chifley and FuturePlus—totalling around $155,000 a year. A statement of claim filed in the Federal Court last year alleged Mr Riordan had received $1,807,884 in fees since 1998 from sitting on the boards of EISS, FuturePlus Financial Services, Chifley Financial Services and Mert Ltd. The statement was filed by Dean Mighell, secretary of the Victorian branch of the ETU.

Chifley Financial Services, according to its website, was established by Unions NSW in 1991. This was at the time compulsory superannuation arrangements were first commencing and presumably Unions NSW saw a way to obtain an advantage from these arrangements. In 2010, Unions NSW owned one-third of Chifley, EISS another third, and the last third was held by the Local Government Superannuation Scheme. In that year Chifley paid a total dividend exceeding $5 million split three ways between Unions NSW, EISS and the Local Government Superannuation Scheme.

Subsequently, there have been changes in the ownership of Chifley and one-third of the company is now owned by the Australian Workers Union. Chifley is the trustee of a public office superannuation fund called FuturePlus Super. There are complex arrangements between EISS, Chifley, FuturePlus Financial Services and FuturePlus Super. FuturePlus Super paid Chifley a fee of $3.5 million in the most recent reported year for acting as trustee.

These arrangements in my view raise a number of important questions. Firstly, what is the basis on which those charged with carriage of EISS—the directors including Mr Riordan and Mr Whelan—have decided that FuturePlus Financial Services is an appropriate asset to be owned by EISS? Remember that the assets of EISS are there for the sole purpose of providing benefits to members of the fund on their retirement and certain related and ancillary purposes under section 62 of the Superannuation Industry Supervision Act. Therefore, the initial decision to invest in FuturePlus must meet this test, so must the decision recently taken by directors to acquire from the Local Government Superannuation Scheme a further 50 per cent interest in FuturePlus so that EISS now holds 100 per cent of FuturePlus. In considering whether this is a good investment, it is relevant to note that FuturePlus's 2011 annual financial statements show a loss of $1.6 million and contain a warning that says: 'A significant volume of the company's revenues arise from administration serviced through superannuation funds.' In other words, the customer base is far from diversified exposing the company to risk if it loses a customer.

Secondly, what do the directors of EISS intend to do in response to last year's finding by the NSW Attorney-General that said:

The Energy Industries Superannuation Scheme is exposed to significant risk resulting from major changes to its administrator, FuturePlus.

EISS may need to provide funding to FuturePlus to support infrastructure investments to comply with the proposed Stronger Super regulatory reform

Thirdly, what is the basis on which the directors of EISS decided that Chifley Financial Services was an appropriate company to invest in? Its website says:

Because of our unique history and ownership, Chifley’s primary business driver is not profit, but respect for the needs of all our clients.

That is all very well, but the job of the directors of EISS is to maximise the retirement benefits of members of the scheme. EISS members might reasonably wonder whether EISS should not exit its investment in Chifley and reinvest the money in a company which is focused on profit.

Fourthly, what was basis on which EISS first chose to acquire a stake in Chifley following its original 100 per cent ownership by Unions NSW? Was this decision influenced by the close ties of at least some of the directors with Unions NSW, given that it presumably involved a cash payment to Unions NSW using money, but beneficially belonging to the members of the EISS?

Fifthly, the FuturePlus Super fund, of which Chifley is the trustee, had $428 million of gross assets at 30 June 2010. The fund paid Chifley fees of almost $3.3 million in that year. In turn, most of these assets are invested in another entity—Chifley Investment Fund. The responsible end of that fund is Chifley Financial Services Pty Ltd and it charged that fund an annual fee in 2010 of almost $1.6 million. Why has this complex multilayered structure been chosen and, as a result, are the total effective fees being charged to members of FuturePlus Super higher than they need to be?

Sixthly, in view of the rhetoric appearing on the Chifley website, is it possible that members of FuturePlus may think they are members of an industry fund rather than a fund operating effectively on a for-profit basis?

Seventhly, were the arrangements under which Chifley was appointed as trustee of FuturePlus Super, and FuturePlus Financial Services was appointed to provide administration services to EISS, subject to a competitive market process to test whether the members of these funds were getting the best possible value? Given the potential for conflict of interest, was this process conducted at arm's length and did directors with the potential conflict absent themselves from decision making or at the very least declare their interest. The issue of conflict of interest was raised by the recent Cooper review into superannuation, which said:

The identification and management of conflicts of interests and of duties are a particular priority.

… … …

it is clear from the Review’s analysis that there is a need for greater clarity of what is required of superannuation fund trustees and trustee‐directors in this regard.

Eighthly, what is the basis on which directors appointed by EISS vote on decisions facing the boards of Chifley and FuturePlus given the general law as to the directors' duties is clear that a director must act in the best interests of the company of which he or she is a director, not in the best interests of the company which appointed him or her?

Ninthly, can members of EISS be satisfied that their directors have appropriate skills and qualifications to manage a $2 billion-plus investment portfolio?

How does a background as a union official equip somebody to carry out this specialised and critical function? This issue is rife throughout public sector and industry superannuation funds, where directors are typically appointed by sponsor organisations. Evidently, in the case of the EISS the sponsor organisation was the New South Wales ALP. This issue too was raised by the Cooper review:

Contemporary best practice in corporate governance for listed companies includes the presence of independent directors on the board. The panel believes that a minimum number of non-associated trustee directors such that they can genuinely influence the decisions of those boards should be required on all superannuation trustee boards.

Unfortunately, as Assistant Treasurer, Bill Shorten did very little in response. Why is the government hastening so slowly on this issue? Why has it not been included in the present Productivity Commission inquiry into the My Super arrangements? Is it because it suits the union movement very well that industry and public sector superannuation funds typically involve large number of well-paid directorships divvied up amongst the union mates, whether or not they trouser the director fees personally or pay them into the union coffers? Is it because the AWU, of which Minister Shorten is a former national secretary, has a strong vested issue in this industry, not least as the one-third owner of Chifley Financial Services?

The arrangement here is one which is not unusual amongst public sector and industry superannuation funds, particularly in the use of assets of the fund beneficially owned by the fund members to acquire or establish companies delivering specific financial, administrative or other services to members of the fund or other superannuation funds. Superannuation funds are supposed to have the sole purpose of being a vehicle to accumulate and disperse the retirement savings of members. They are not supposed to be a vehicle used by a board heavy with union and ALP officials to build up a cluster of investments in firms offering financial planning, funds administration and other services, which in term become, firstly, a means to generate profits and stream them through to unions and union peak bodies and, secondly, a means to create additional boards in multilevel structures, allowing those officials to maximise their opportunities to collect directors fees.

I call upon the minister, Bill Shorten, and the regulator, APRA, to look carefully at these arrangements to satisfy themselves and, in turn, the Australian people that the sole purpose test in the superannuation legislation is being met and that investment decisions concerning the EISS assets are being taken for the sole purpose of delivering retirement and incidental benefits to EISS members and not for the purpose of increasing the economic power and financial wellbeing of union officials and the unions they control.