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Wednesday, 25 November 2015
Page: 8903

Senator MUIR (Victoria) (10:51): I rise to make a contribution to the debate on the government's Superannuation Legislation Amendment (Trustee Governance) Bill 2015. The bill makes various changes to the Superannuation Industry (Supervision) Act 1993, or SI(S) Act, with the main changes being a new requirement that all new superannuation funds regulated by APRA have at least one-third independent directors and appoint an independent chair. The issue of whether there should be a mandated number of independent directors is not a new one. I am not going to go over all the history. I think most people who are interested in this debate know enough about it.

It is no surprise that this change is being pursued by the government. One of the key reasons behind the change dates back to 2010, when the ALP-initiated Cooper review was published. At page 54 of the Cooper report, it stated:

Equal representation was an important aspect of the governance structure established by the SIS Act in 1993.

…   …   …

However, the Panel has come to the view that changes in the industry over time and certain implementation practices mean that equal representation no longer seems to achieve its original stated objective.

…   …   …

Equal representation leaves significant groups 'unrepresented.' Key among these are members who are pensioners (and potentially other post-retirement members in the future) and members who have joined the fund because they exercised fund choice. These groups of members, already sizeable in some funds, can be expected to grow in the future.

In responding to this and other recommendations, the then ALP government considered:

… beyond the existing regulatory framework, the composition of a trustee board is a matter for the board to determine, but will refer to APRA the need for guidance on managing conflicts of interest.

It also considered:

… the current arrangements requiring equal representation remain appropriate in ensuring members are able to participate in the management and protection of their retirement savings.

Well, five years later and here we are. I have a feeling that, if this issue is not resolved now, we will be back here looking at it again in 2020.

In assessing this policy change, I asked myself this simple but important question: is there sufficient justification for imposing a mandatory number of independent directors on all super funds? I knew that, if I answered yes to this question, I could then look at whether the legislation gave effect to this and also examine any unintended consequences that may arise. There were some solid arguments, but in the end I answered yes to that question. One of the main reasons as to why I arrived at this position was a meeting that I had with the Association of Superannuation Funds of Australia, or ASFA.

ASFA appealed to me because their membership includes corporate, public sector, industry and retail super funds that represent of 90 per cent of the 14 million Australians with superannuation. They seemed to approach this issue with the hope of finding a compromise position while still giving effect to the main policy change that the government wants, much like what I and my colleagues on the crossbench do from time to time. ASFA support the government's policy change, which will see at least one-third independent directors on super boards as well as an independent chair. Importantly, ASFA stated:

This support should not be seen as a criticism of current governance structures, but instead recognises changing community expectations, increased complexity and risk in running superannuation businesses, and significantly higher regulatory standards and liability.

The superannuation system has changed and will continue to evolve into the future. Many super funds are public offer, meaning that anybody in any industry can join. As a result, we are seeing super funds which traditionally only had members who were from specific occupations broaden their member base.

Many industry super funds decided to become publicly available to the whole community over a decade ago. This is the basis for widespread advertising by industry funds such as Hostplus and AustralianSuper which sponsor football teams and other sporting codes. Currently there are 161 public offer funds and 125 non-public-offer funds. Most importantly, the public offer funds account for 89 per cent of the members and 78 per cent of the funds under management. All public offer super funds have elected to be publicly available to consumers from all types of employment. As a result, all public offer funds have both a legal and a fiduciary responsibility to all their members, regardless of their field of employment. Do these funds require special board arrangements to suit particular sectors when they are obliged to serve the interest of all consumers, not just a subset of their membership, or should the requirement of a mandated number of independent directors apply only to public offer funds?

Arriving at the position of agreeing that there should be a mandated number of independent directors is, however, only one hurdle. There are two other issues that I have had to carefully consider, and these two issues have been the main obstacle as to whether I can support this bill. These are the removal of the representative governance model from legislation and some of the consequences that will occur as a result of the definition of 'independent'.

Removing the representative governance model has attracted a lot of criticism. When this bill was considered by the Senate Economics Legislation Committee, the Department of the Treasury told the committee that, although the equal representation model had been appropriate in 1993, when superannuation was made compulsory, it had lost its utility. The Treasury noted the Cooper review, which found that industry change had lessened the need for equal representation. The Treasury submitted that the equal representation model was now detrimental to governance:

The current equal representation model in the Superannuation Industry (Supervision) Act 1993 (SIS Act) hinders the natural refreshing of boards because of the restrictions on the number of independent directors that can be appointed to some registrable superannuation entity (RSE) licensee boards.

In contrast, Mr Alan Kirkland, the Chief Executive Officer of CHOICE, told the committee that, although they supported the introduction of independent directors, the changes set out by the bill were significant. He told the committee that the bill takes quite a big step in repealing part 9 of the act and, in doing so, removing the definition of a 'member representative' and 'employer representative' as well as the basic equal representation rule, which seems like a very big change in the context of the overall aim of this bill.

Representatives of the ACTU told the committee that the equal representation model was successful in fostering consensus in board decisions. Further, the ACTU told the committee that change was not needed while the system was successful. Further, ASFA submitted that its members expressed strong concerns regarding the repeal of the equal representation provisions and recommended that those provisions remain in the legislation.

I note that Senator Bushby, while questioning representatives from the Australian Institute of Superannuation Trustees, stated that if the bill was passed it would still be open for a fund:

… to decide to maintain … 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 from the AIST said in response:

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.

This was a big concern to me, which is why I am considering moving an amendment which will keep the representative model in legislation. I am currently consulting with and will continue to consult with relevant stakeholders on this amendment prior to circulating it. I think there needs to be some serious debate on this amendment and other issues relating to this bill, and I will support the second reading in order to see this bill moved into the committee stage. I have not indicated my final position on this bill to the government, but I am hopeful that we can negotiate a way forward—and it seems to be a common theme in the chamber.

In relation to the definition of 'independent', some submitters raised concern about the proposed definition of 'independent' for the purpose of meeting the requirements of the bill. For example, the Governance Institute of Australia suggested that legislation should 'set out the principle of independence but not prescribe a definition'. ASFA recommended that two changes be made to the definition. In their submission to the economics legislation committee, they stated:

ASFA recommends that the definition of ‘independent’ in the legislation be amended to enable organisations to retain the ability to have common independent directors on the boards of RSEs under the same financial conglomerate group, rather than having to rely on APRA to make a determination on a case-by-case basis.

We believe that, on balance, this is an appropriate exclusion given that there are no limitations proposed in the revised draft legislation on an individual holding office as director on multiple unrelated RSE licensees.

In our view, allowing directors to sit on multiple unrelated RSE licensees where the RSEs are in competition with each other but not sit on multiple related RSE licensees within the same financial conglomerate group as an independent director would be a poor policy outcome.

ASFA also recommended that the definition of independent in the legislation be amended:

… so that recent executive officers and directors of firms that are suppliers to the RSE licensee, but who themselves have had no previous dealings with the RSE licensee, should be allowed to be appointed as an independent director.

For example, a former tax partner (within the last three years) of a firm that currently provides audit services to the fund, but who has never themself had any dealings with the fund, should not be precluded from being appointed as an independent director.

ASFA considers that such situations can be adequately addressed as part of the RSE licensee’s conflicts management policy and procedures.

I think these recommendations improve the definition of 'independent', and I will support amendments that give effect to them.

Before I finish, I want to touch on some of the masses of emails that my office received. The emails included a line that said, 'Please vote to stop the government handing over our super to the big banks.' My response to this is that it is simply not true. Industry funds are corporate trustees where the relevant union and employer organisation own half the shares in the trust each. For example, the shareholders in AustralianSuper are the ACTU and the Australian Industry Group. The unions and employer groups will retain control over which independent directors should be appointed to the board. If the unions and employer organisations wish to appoint independent directors with backgrounds other than in finance, such as consumer representatives, they are entitled to do so.

Time and time again I see these campaigns that are full of misinformation. By all means, I want people to have their say and to let me know how they think I should vote, but I would prefer if their say is based on the facts and not blind ideology. If I wanted to make decisions based on ideology, I would not be on the crossbench.