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Monday, 9 November 2015
Page: 7996

Senator RUSTON (South AustraliaAssistant Minister for Agriculture and Water Resources) (17:16): I move:

That this bill be now read a second time.

I seek leave to have the second reading speech incorporated in Hansard.

Leave granted.

The speech read as follows—

This Bill amends the Superannuation Industry (Supervision) Act 1993 to introduce a higher standard of governance for superannuation funds, in line with domestic and international best practice.

The changes fulfil the Government's election commitment to align governance in superannuation more closely with the corporate governance principles applicable to ASX listed companies.

Independent board members bring different skills and expertise and they hold other directors accountable for their conduct, particularly in relation to conflicts of interest.

In this regard, superannuation is lagging behind other corporate sectors, including listed companies, banks, and life and general insurers, who all, at a minimum, either have or are recommended to have a majority of independent directors with an independent chair.

Existing superannuation fund board composition requirements are outdated and no longer reflect the size of the industry. This is an industry which currently has over $2 trillion in assets, a figure that represents more than 120 per cent of Australia's GDP. Based on current projections, Australia's superannuation industry is expected to grow to $9 trillion by 20401.

The changes in this Bill will therefore require superannuation funds to have at least one-third independent directors, with an independent chair, and they will apply equally to all Australian Prudential Regulation Authority (APRA) regulated superannuation funds, including corporate, industry, public sector, and retail funds. There will be a three year transition period for established fund trustees to assist them to transition in an orderly manner to the new requirements.

The Bill will modernise board requirements to help ensure that directors with the best experience and expertise are represented on superannuation trustee boards; enhancing decision making and producing better outcomes for fund members.

Our key objective is to have the best people governing the retirement savings of Australians, and I'm confident these reforms will do just that.

Superannuation is now the second largest asset held by Australians after the family home.

The significance of superannuation for Australian households will only increase over time. Currently employers are required to make minimum payments to complying superannuation funds at the rate of 9.5 per cent of salary and wages to build employees' retirement savings. This contribution rate is scheduled to rise to 12 per cent by 1 July 2025.

Employees cannot generally access their superannuation until they retire and they rely on others to manage their superannuation until that time.

The Government wants to make sure that superannuation is managed with the highest possible standards of governance, in a way that is in superannuation members' best interests. This, fundamentally, is what this Bill seeks to bring about.

Having independent directors on boards is consistent with international best practice on corporate governance. For example in Canada, it is recommended that the board of directors of every corporation should be constituted with a majority of individuals who qualify as unrelated directors. In the United Kingdom, the Corporate Governance Code recommends that at least half the board should comprise non-executive directors determined by the board to be independent.

APRA regulates the superannuation industry and part of APRA's mandate is to mitigate systemic risk to the financial sector. APRA considers that one way of mitigating risk is by requiring the boards of banking and insurance entities to have a majority of independent directors. APRA recognises that where funds are being managed by agents of depositors or policyholders, independence helps ensure that decisions are made in the best interests of the depositors or policyholders.

In APRA's words, "APRA's experience, over many years and across all industries, suggests that having at least some independent directors on boards best supports sound governance outcomes… In APRA's view, the diversity of views and experience that independent directors bring supports more robust decision making by boards."2

The issue of governance of superannuation has been considered by both the previous government's Cooper review into the superannuation system in 2010 and the Financial System Inquiry (FSI) in 2014.

Both these independent reviews included widespread consultation, with views provided by industry associations, community groups, and other stakeholders, including superannuation funds, both industry and retail.

Both of these independent reviews recommended that the superannuation law be changed so that independent directors be included on the board of superannuation funds' trustees. In fact, the Cooper Review received in excess of 450 submissions over 12 months and the Murray Review received over 6000 submissions over

12 months.

In the previous government's Cooper review, the panel noted that members' interests would be best served where members are represented by people independent from management and other interests and who can provide an outside perspective.

The Cooper review recommended that at least one-third of directors on superannuation fund boards should be independent.

In the FSI, the panel noted that including independent directors was international best practice, improves decision making and helps hold non-independent directors to account for their conduct.

The FSI review went on to recommend that superannuation funds should have a majority of independent directors in order for them to be an effective influence on board decisions.

The Government carefully considered this FSI recommendation, but believes that proceeding with one-third independent directors, including an independent chair, strikes an appropriate balance while still substantially strengthening governance arrangements.

The Government is also mindful of the scale of change that would be required if a majority was mandated.

Consistent with the ASX Corporate Governance Principles, trustees without a majority of independent directors will still be required to publicly report on an 'if not, why not' basis in their annual report whether they have a majority of independent directors commencing 1 July 2019.

This will mean that funds will need to provide greater transparency about their choices concerning the composition of their boards. This requirement will be implemented through changes to the reporting requirements in the Corporations Regulations 2001.

In concluding that superannuation fund boards should have independent directors, the FSI noted the governance framework for Australian superannuation funds has shortcomings that are inconsistent with good governance principles and, in the Inquiry's view, need to be addressed.

The Government agrees — and is now proceeding to modernise board requirements through the inclusion of a greater number of independent board members.

Superannuation is complex and funds are becoming larger and increasingly sophisticated - both in relation to their internal operations and investments. It is therefore incongruous for superannuation to operate under inferior governance arrangements to those of other APRA regulated entities.

To address these shortcomings, this Bill contains a number of amendments to the Superannuation Industry (Supervision) Act 1993 (SIS Act).

This Bill will amend the SIS Act by repealing the existing Part 9 and substituting a new Part 9.

The Bill will require registrable superannuation entity corporate licensees to have at least one-third independent directors, with an independent chair.

One of the features in the existing Part 9 of the Superannuation Industry (Supervision) Act 1993 is that it requires equal representation on trustee boards in employer-sponsored funds, which are generally, but not exclusively, industry funds and corporate funds.

The Cooper review examined in detail the equal representation model and found that although it was an important part of the governance structure 20 years ago, 'changes in the industry over time and certain implementation practices mean that equal representation no longer seems to achieve its original stated objective'.3

The Cooper Review recommended (Recommendation 2.4) was that the SIS Act should be amended so that it is no longer mandatory for trustee boards to maintain equal representation in selecting its trustee‐directors.

The Cooper Review also noted that "The equal representation model appears to impose rigidity into fund governance practices and reduce accountability, without contributing materially to the representation objective on which it was predicated."

The changes this Bill makes are consistent with the Cooper Review recommendations and observations.

Importantly, this legislation does not restrict the composition of the remaining

two-thirds of board members. Apart from having one-third independent trustees mandated, it will be the responsibility of the board to decide how the remaining two-thirds of directors are comprised.

The Government considers it is appropriate to leave it to boards to structure themselves in the manner they believe will serve their members' best interests.

Boards will be able to choose to have the remaining two-thirds of their directors split between member and employer representatives if they consider it appropriate. The Government is in no way preventing trustees from enshrining equal representation in their constitutions.

The Bill includes a new definition of 'independent' that will ensure a director of a superannuation fund board is able to exercise independent judgement.

The definition excludes individuals who have a substantial holding in the licensee or related entity. The definition also excludes individuals who have, or have had, within the last three years, a material business relationship with the licensee, including through their employer. It also excludes a person who is a director or executive officer of an employer sponsor, employer organisation or a group representing the interests of members that has the right to nominate or appoint directors.

The amendments will also contain a mechanism for APRA to make determinations about whether a person is able to exercise independent judgment in performing the role of director. This mechanism is necessary to ensure that there is certainty where an individual might have an unusual relationship with the licensee such that it is unclear whether the individual is 'independent' under the proposed

principles-based statutory test.

Where a person does not meet the definition of independent but the trustee considers that the person has the ability to act independently, a trustee may apply to APRA for a determination that the person is independent.

Recognising that a number of existing funds will need to reconstitute their boards as a result of these reforms, the Bill proposes a three-year transition period, applying from the date of Royal Assent to the legislation. Where an APRA compliant transition plan is in place, the current equal representation rules and the new independent requirements will not apply during that period.

The provisions within the Bill will also override both the governing rules and the constitution of a corporate trustee.

The Bill will also amend the Governance of Australian Government Superannuation Schemes Act 2011. Schedule 2 to the Bill will restructure the trustee board for the Australian government's main civilian and military superannuation schemes, the Commonwealth Superannuation Corporation (CSC Board), to comply with the new governance requirements.

As mentioned earlier, this Bill demonstrates the Government is delivering on its election commitment to align superannuation governance with ASX listed company corporate governance principles and elevates superannuation to a comparable standard that other APRA regulated entities are required to meet. The Bill mandates the need for independent directors, to ensure improved member outcomes for all superannuation fund members.

These reforms have been subject to extensive consultation over a number of years. The Cooper Review released its first issues paper, on governance, in August 2009, over six years ago.

In November 2013, the Government released its discussion paper 'Better regulation and governance, enhanced transparency and improved competition in superannuation'. It sought feedback on how best to ensure an appropriate provision for independent directors on superannuation trustee boards.

The issues were again considered by the FSI in 2014. This year, before seeking to introduce legislation into the Parliament, the Government has conducted two rounds of consultation on exposure draft legislation.

I thank the many people who have been involved in the various and exhaustive consultation processes on the reforms.

I also acknowledge the many funds from the various sectors of the diverse superannuation industry that have already moved to have more independent directors on their boards.

Full details about the amendments are contained in the explanatory memorandum and further details will also be included in APRA's Prudential Standards on governance and transition.

1 Source: 2015 Intergenerational Report Australia in 2055, p66, noting that Treasury estimated this during the Financial System Inquiry (refer to Interim Report p2-84).

2 Helen Rowell, Speech, 'The super system what is on APRA's watch-list?' AFR Banking & Wealth Summit, 29 April 2015

3 Cooper, Super System Review Final Report Part Two, page 53.

Debate adjourned.