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Superannuation Legislation Amendment (Trustee Governance) Bill 2015

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2013-2014-2015

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

SUPERANNUATION LEGISLATION AMENDMENT (TRUSTEE GOVERNANCE) BILL 2015

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by the authority of the

Treasurer, the Hon J. B. Hockey MP)

 



Table of contents

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1               Amendments to the Superannuation Industry (Supervision) Act 1993       7

Chapter 2               Regulation impact statement: Schedule 1: Governance arrangements for registrable superannuation entities............................... 31

Chapter 3               Governance arrangements for the Board of the Commonwealth Superannuation Corporation.......................................... 59

Index................................................................................................................. 65

 



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

APRA

Australian Prudential Regulation Authority

AIST

Australian Institute of Superannuation Trustees

ASFA

Association of Superannuation Funds of Australia

ASIC

Australian Securities and Investments Commission

Bill

Superannuation Legislation Amendment (Trustee Governance) Bill 2015

Corporations Regulations

Corporations Regulations 2001

Cooper Review

Review of the Governance, Efficiency, Structure and Operation of Australia’s Superannuation System

ISA

Industry Super Australia

IGC

Independent Governance Committee

FSC

Financial Services Council

FSI

Financial System Inquiry Final Report

Governance Act

Government Superannuation Schemes Act 2011

RIS

regulation impact statement

RSE

registrable superannuation entity

SIS Act

Superannuation Industry (Supervision) Act 1993

SMSF

self managed superannuation fund



Overview

Schedule 1 to the Superannuation Legislation Amendment (Trustee Governance) Bill 2015 (Bill) makes amendments to the Superannuation Industry (Supervision) Act 1993 (SIS Act) to require trustees of registrable superannuation entities (RSEs) (commonly referred to as RSE licensees) to have a minimum of one-third independent directors and an independent Chair on their boards.

Originating from the Government’s 2013 election commitment, this reform is important because independent directors bring different skills and expertise and they hold other directors accountable for their conduct, particularly in relation to conflicts of interest .

The existing representative board composition requirements in the SIS Act are outdated and no longer reflect the size and complexity of the superannuation industry. In particular, equal representation is out-of-step with other corporate sectors, including listed companies, banks, and general insurers, who all, at a minimum, recommend a majority of independent directors with an independent chair.

Already superannuation funds are recognising the need for greater independence on their boards, with many having moved or moving this way — including retail funds that are members of the Financial Services Council (FSC) as well as a number of industry funds.

The movement towards greater independence on RSE licensees is consistent with the conclusions in two of the major independent reviews of Australia’s financial and superannuation systems (FSI Report and the Cooper Review). For example, the FSI Report said ‘given … diversity of fund membership, it is more important for directors to be independent, skilled and accountable than representative’. (FSI Report, page 135).

Schedule 2 to this Bill amends Finance portfolio legislation entitled the Governance of Australian Government Superannuation Schemes Act 2011. Schedule 2 restructures 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. The CSC Board will comprise a majority of independent directors and the Board will be reduced from eleven to nine directors to better align with the best practice principles of governance.

Date of effect : The amendments in Schedule 1 will take effect from the day the Bill receives Royal Assent. The amendments in Schedule 2 take effect from 1 July 2016.

Proposal announced : For Schedule 1, the Government committed (in September 2013) to improving governance in superannuation by aligning corporate governance in superannuation more closely with the corporate governance principles applicable to ASX listed companies. In progressing this commitment, the Government released a discussion paper Better regulation and governance, enhanced transparency and improved competition in superannuation on 28 November 2013. On 26 June 2015, the Government released exposure draft legislation to improve governance in superannuation. For Schedule 2 no announcement was made.

Financial impact : This Bill has a n il financial impact.

Human rights implications : Schedules 1 and 2 do not raise any human rights issue. See Statement of Compatibility with Human Rights — Chapter 1, paragraphs 1.26 to 1.29 and Chapter 3, paragraphs 3.17 to 3.20.

Compliance cost impact : For Schedule 1 there is $8.5 million in start-up costs and a further $12.3 million in ongoing costs annually. For Schedule 2 there are no compliance costs, note t he Office of Best Practice Regulation advised that a regulation impact statement was not required.

Summary of regulation impact statement

Regulation impact on business: Schedule 1: Governance arrangements for registrable superannuation entities

Impact : The amendments will result in $8.5 million in start-up costs and a further $12.3 million in ongoing costs annually.

Main points :

•        Legislation to require a minimum of one-third of directors to be ‘independent’ with an independent Chair to commence on date of Royal Assent, with a three year transition period.

•        The primary costs that will be incurred relate to increased remuneration costs associated with the new governance requirements. Other significant costs include search and engagement costs and legal costs (such as changes to constitutions and trust deeds).

•        The impact on industry is expected to be $8.5 million for start-up costs and a further $12.3 million annually for the ongoing costs.

•        Success will be measured by how quickly superannuation trustee boards move to a minimum one-third independent directors. However, the ultimate yardstick will be at the end of the three-year transition period to assess how many trustees are compliant with the requirements.

 



Outline of chapter

1.1                   Schedule 1 to the Superannuation Legislation Amendment (Trustee Governance) Bill 2015 (Bill) will amend the Superannuation Industry (Supervision) Act 1993 (SIS Act) to introduce new governance arrangements requiring corporate trustees of registrable superannuation entities (RSEs) (commonly referred to as RSE licensees) to have at least one-third independent directors and for the Chair to be one of these independent directors.

1.2                   The new governance arrangements will replace the existing requirements in Part 9 of the SIS Act that require equal representation of employer representatives and member representatives on the boards of standard employer-sponsored superannuation funds of five or more members.

1.3                   The Bill provides a revised definition of independent in the SIS Act. Under the definition, persons who would not be considered to be independent include those who are substantial shareholders of the RSE licensee or who have or have had, within the last three years, a material business relationship with the RSE licensee.

1.4                   RSE licensees must comply with APRA’s prudential standards relating to the appointment and removal of independent directors.

1.5                   If a person fails to meet the new definition of independent, an RSE licensee can apply to APRA for a determination that the person is independent based on the circumstances relating to that person. APRA can also determine that a person is not independent.

1.6                   To facilitate an orderly transition to the new arrangements, the Bill provides for a three-year transition period from the date of Royal Assent.

1.7                   All references in this chapter are to the SIS Act unless otherwise specified.

Context of amendments

1.8                   The size of the superannuation savings pool in Australia is currently over $2 trillion and is expected to grow to approximately $9 trillion by 2040. While compulsory superannuation has been in existence since 1992, its significance in Australia’s financial system has increased rapidly in recent years as the pool of savings continues to grow and the importance of strengthening the superannuation system is widely acknowledged in broader economic discussions.

1.9                   Appropriate provision of independent directors on superannuation trustee boards is a vital step towards strengthening the superannuation system.

1.10               Independent directors bring to the board an external, dispassionate perspective, enabling boards to benefit from a diversity of views and providing a check on management recommendations. In contrast to directors who may be executives of the RSE licensee’s business or who represent employers or employees, independent directors are more likely to be free of the types of conflicts that may cause them to (either intentionally or unintentionally) serve the interests of the employer sponsors, a related party or a subset of members, rather than the fund’s entire membership.

1.11               The presence of a greater number of independent directors will enable the decision making processes of superannuation boards to be tested and challenged in a way that achieves beneficial member outcomes. A requirement for a minimum number of independent directors will also provide greater diversity of skills and experience by ensuring that trustee directors are drawn from a wider pool.

1.12               A greater number of independent directors will therefore increase the accountability of management and strengthen oversight of the fund—helping to ensure that related party interests are not put ahead of member interests.

1.13               Increasing the level of independence on RSE licensee boards is therefore a key to improving governance in the superannuation system, thus improving member outcomes. In this vein, the 2014 Financial System Inquiry Final Report (FSI) suggested that good governance can increase returns to members (FSI, page 133).

1.14               Further, both the 2010 Review of the Governance, Efficiency, Structure and Operation of Australia’s Superannuation System (Cooper Review) and the FSI said that including independent directors on boards is consistent with international best practice on corporate governance.

1.15               The equal representation model in the SIS Act hinders natural refreshing of boards because of the restrictions on the number of independent directors that can be appointed to certain RSE licensee boards. Under the SIS Act, RSE licensees operating under the equal representation model are permitted to only appoint one independent director unless they seek approval from APRA to appoint more than one independent director. Further, whether a person will appropriately represent the interests of employers or employees is often the first consideration when appointing new directors to the board, with ensuring fresh thinking and appropriate skills being a secondary consideration.

1.16               The FSI indicated that the equal representation model is less relevant in the current superannuation system, which predominantly consists of public offer accumulation funds and funds less focused on single employers.

1.17               A similar conclusion was reached earlier by the Cooper Review, which examined the equal representation model and found that although it was an important part of the governance structure back in 1993, ‘changes in the industry over time and certain implementation practices mean that equal representation no longer seems to achieve its original … objective’ (Cooper Review, page 53).

1.18               Additionally, until recently, a large proportion of retail funds comprised boards made up of a majority of executives. While in 2012 the FSC introduced a binding standard on its members requiring them to appoint a majority of independent directors and an independent Chair (with mandatory compliance from 1 July 2014), not all retail funds are FSC members; nor is APRA empowered to force FSC member funds to comply with the FSC standard. These legislative changes will therefore ensure that irrespective of whether they are FSC members, all retail funds will have at a minimum an independent Chair and one-third independent directors.

1.19               RSEs licensees are generally regulated by both the SIS Act and the Corporations Act 2001 (and related regulations, along with APRA’s prudential standards).

1.20               APRA has prudential oversight of the superannuation system and the SIS Act allows it to issue prudential standards relating to superannuation. Prudential standards are designed to provide additional detail on prudential matters set out in the enabling legislation. Prudential standards are legislative instruments, disallowable in the Senate, and require extensive industry consultation as part of their development and ongoing revision.

1.21               The Australian Securities and Investments Commission (ASIC) regulates the conduct and disclosure obligations of financial services providers (including superannuation trustees that hold an Australian financial services licence).

1.22               The Australian Taxation Office has responsibility for the oversight of self managed superannuation funds (SMSFs).

Summary of new law

1.23               APRA-regulated superannuation funds are required to operate under trustee arrangements. Under this framework, a corporate trustee overseen by a number of individual directors, or a group of individual trustees, is responsible for managing a superannuation fund’s assets on behalf of the fund’s members and beneficiaries. The trustee is known as an RSE licensee as it operates under an RSE licence issued by APRA.

1.24               A feature of the current governance framework is the requirement for some trustee boards to have equal representation. The SIS Act requires that the board of a corporate trustee for a standard employer-sponsored fund of five or more members must consist of equal numbers of employer representatives and member representatives. This reflects that originally the vast majority of funds were single employer sponsor corporate funds and equal representation ensured both stakeholder groups had oversight and responsibility for the fund’s operations.

1.25               The Bill requires RSE licensees to have a minimum of one-third independent directors and an independent Chair on their boards. Where the trustee is a group of individual trustees, one-third of these individuals must be independent.

1.26               The Bill provides a revised definition of independent. It includes, among others, persons who are not substantial shareholders of the RSE licensee or who do not have or have not had within the last three years a material business relationship with the licensee.

1.27               Where a person does not meet the definition of independent but the RSE licensee considers that the person has the ability to exercise independent judgement in performing the role of a director of an RSE licensee, the RSE licensee may apply to APRA for a determination that the person is independent. APRA can also determine that a person is not independent if APRA is reasonably satisfied that the person is unlikely to be able to exercise independent judgement in the role.

1.28               Existing RSE licensees that comply with transition requirements set out in APRA’s prudential standards will not have to comply with the new arrangements until the end of a three-year transition period, which will commence from Royal Assent. The purpose of the transition period and APRA’s prudential standards relating to transition is to facilitate an orderly transition to the new arrangements.

1.29               RSE licensees that notify APRA that they intend to cease operating by the end of the transition period and meet the applicable requirements of APRA’s prudential standards will not have to comply with the new requirements.

1.30               Trustees licensed by APRA after Royal Assent will need to comply with the new requirements from the time they are licensed.

1.31               The new governance rules will not apply to self managed superannuation funds. They will also not apply to a fund that has an acting trustee appointed under section 134 of Part 17 of the SIS Act.

1.32               All RSE licensees will be required to publicly report (on an ‘if not, why not’ basis) in the annual report of each of their RSEs whether they have a majority of independent directors or not.

1.33               This reporting obligation provides RSE trustees with the opportunity to provide a clear indication of the rationale underlying their composition. In particular, it allows the board to explain how it believes that its chosen composition will best serve the interests of fund members.

1.34               This reporting obligation will take effect for financial years beginning from 1 July 2019 (the first reporting period would take place in September 2020 for the financial year 2019-20). This requirement will be implemented through changes to the reporting requirements in the Corporations Regulations 2001 .

Comparison of key features of new law and current law

New law

Current law

RSE licensees are required to have a minimum of one-third independent directors and an independent chair on their boards. Where the RSE licensee is a group of individual trustees, one-third of these individuals must be independent.

Boards of standard employer-sponsored superannuation funds with five or more members must maintain either equal representation of employer representatives and member representatives or an independent trustee.

New section 86 provides APRA with the power to make prudential standards relating to the appointment and removal of independent directors.

 

Under section 107 of the SIS Act a trustee of an employer-sponsored fund has a duty to establish procedures for appointing and removing member representatives.

Under section 108 of the SIS Act a trustee of an employer-sponsored fund has a duty to establish procedures for appointing and removing an independent trustee or independent member of the board of directors of the corporate trustee.

New section 87 provides two sets of conditions that if present would result in a person not being considered to be independent. The first set (87(1)(a) — (c)) relates to ownership (or structural) arrangements relating to the RSE licensee. The second set (87(1)(d) — (f)) relates to the relationships an RSE licensee might have.

The definition of independent director in section 10 of the SIS Act is concerned with whether a person is independent of the members and the employers of the fund, and does not cover any other relationships with the RSE licensee that might affect a person’s ability to exercise independent judgement .

APRA has the capacity to determine if a person is, or is not, independent.

 

APRA’s prudential standards will set out details on how existing RSE licensees are required to transition to the new governance regime.

 

Detailed explanation of new law

1.35               Existing Part 9 of the SIS Act, which contains the equal representation provisions, will be repealed. The new independent director governance provisions for registrable superannuation entities (RSEs) (new Part 9) will be inserted to give effect to the Government’s superannuation election governance commitment. [Schedule 1, Part 1, item 1]

1.36               Replacing existing Part 9 with the new Part 9 establishes a uniform set of requirements governing board composition in legislation (that is, the minimum one-third independent director requirement). While RSE licensees will be required to have one-third independent directors on their boards they will be free to set the composition of the remainder of the board to best serve the interests of fund members.

1.37               The appointment of directors, including independent directors, to RSE licensees is subject to APRA’s prudential standards relating to appointments. This includes compliance with the fit and proper test as well as the requirement for directors, collectively, to have the necessary skills, knowledge and experience to understand the risks of the institution, including its legal and prudential obligations, and to ensure that the institution is managed in an appropriate way taking into account these risks.

Requirement to have independent directors

1.38               New section 86 establishes the governance provisions that require all RSE licensees with a corporate structure to have a minimum of one-third independent directors and an independent Chair. [Schedule 1, Part 1, item 1, paragraphs 86(1)(a) and (b)]

1.39               RSE licensees that adopt a corporate structure must have at least one-third independent directors and an independent Chair. [Schedule 1, Part 1, item 1, paragraphs 86(1)(a) and (b)]

1.40               The requirement to have an independent Chair for RSE licensees that have a corporate structure, reflects the pivotal role that a Chair has in the establishing the direction and oversight of the decision making process of a board.

1.41               When satisfying the one third independent requirement the independent Chair is considered to be one of the independent directors. [Schedule 1, Part 1, item 1, subsection 86(2)]

Example 1.1  

An RSE licensee has a nine person board. The Chair and two other directors are independent. This will satisfy the new requirements because one-third of the directors, including the Chair are independent.

1.42               The transition requirements make it clear that an RSE licensee has until the end of the transition period to achieve full compliance with all the new requirements, including deciding which of the independent directors is to be appointed as Chair.

1.43               This will allow time for any new independent directors appointed to the RSE licensee board to become sufficiently experienced before potentially having to take on the role of Chair.

1.44               When making appointments to meet the new Part 9 requirements for one-third independent directors, RSE licensees must comply with APRA’s prudential standards relating to the appointment and removal of independent directors. [Schedule 1, Part 1, item 1, paragraph 86(1)(c)]

1.45               In the small number of cases where an RSE licensee is made up of individual trustees (the RSE licensee does not have a corporate structure), at least one-third of those trustees must be independent. [Schedule 1, Part 1, item 1, paragraph 86(3)(a)]

1.46               Where the RSE licensee comprises individual trustees and those trustees customarily appoint a nominal Chair, they will not be required to have an independent Chair.

1.47               RSE licensees that are groups of individual trustees must comply with APRA’s prudential standards relating to the appointment and removal of independent trustees. [Schedule 1, Part 1, item 1, paragraph 86(3)(b)]

Definition of independent

1.48               New section 87 sets out the definition of independent for the purpose of satisfying the one-third independent director requirement. The definition provides that a person is ‘independent’ from an RSE licensee unless certain conditions are present.

1.49               New section 87 provides two sets of conditions that, if present, would result in a person not being considered to be independent.

•        The first set (87(1)(a) to (c)) relates to ownership (or structural) arrangements relating to the RSE licensee.

•        The second set (87(1)(d) to (f)) relates to relationships an RSE licensee might have.

1.50               New section 87 also allows APRA, under sections 88 and 90, to take into consideration whether or not a person has the ability to exercise independent judgement in performing the role of a director of an RSE licensee.

1.51               To ensure flexibility to address future developments in the superannuation industry, new section 87 provides for regulations to be made that will specify circumstances that would result in a person being either independent or not independent.

1.52               The definition of independent in this Schedule replaces the existing definition of an independent director in section 10 of the SIS Act to ensure a broader range of circumstances are taken into account when considering a person’s ability to exercise independent judgement.

1.53               In particular the current definition of independent director in the SIS Act is designed to achieve independence from stakeholders (that is, employers and members and their representative organisations), whereas the new definition looks at ownership (or structural) arrangements relating to the RSE licensee as well as the relationships an RSE licensee might have. Under the revised definition, a person’s independence is not affected by that person’s membership of the fund.

Ownership arrangements that prevent independence

1.54               A person cannot be considered to be an independent director of an RSE licensee if they hold an interest of 5 per cent or more of the share capital of the RSE licensee or another body corporate that is related to the RSE licensee. [Schedule 1, Part 1, item 1, paragraphs 87(1)(a) and (b)]

1.55               For the purposes of new Part 9, the question of whether bodies corporate are related to each other is to be determined in the same way as that question would be determined under the Corporations Act 2001 .

1.56               An exception is provided for a director who holds a shareholding interest that does not confer a right to profit or give rise to the expectation of a profit, if that director holds the interest as a result of holding office as a director of the RSE licensee. [Schedule 1, Part 1, item 1, subsection 87(2)]

Example 1.2  

A director on the board of a ‘not for profit’ super fund was asked to hold a parcel of shares (which constituted more than a five per cent holding) in the super fund’s RSE licensee for the period of his directorship. The parcel of shares was held by the director by virtue of his/her office and did not create or impose any right for the director to profit in any way. As such, the nominal holding will not be in itself taken to compromise the director’s ability to be considered to be independent.

1.57               A person will not be considered independent if they are, or they have been in the preceding three years, an executive officer or employee of the RSE licensee. Similarly a person will not be considered to be independent if they are currently, or in the previous three years, have been a director or executive officer of a related body corporate of the RSE licensee. [Schedule 1, Part 1, item 1, paragraph 87(1)(c)]

Example 1.3  

A director on an RSE licensee board is also an executive officer of a financial services company operating in the same financial conglomerate group. As the RSE licensee and the life company are related bodies corporate, this director cannot sit on the RSE licensee board as an independent director.

Relationships that prevent independence

1.58               Where there is a business relationship between the RSE licensee and a person in their capacity as an employer, a director or executive officer of a corporate entity, that person will not be independent if the corporate entity has, or has had in the preceding three years, a business relationship that was material to either the RSE licensee or the other person. An employee of such a corporate entity will also not be independent if they are currently, or were in the preceding three years, involved in the business relationship that was material. [ Schedule 1, Part 1, item 1, paragraph 87(1)(e)]

1.59               An individual person (for example, in the capacity as a sole trader) will not be independent if they have, or had in the preceding three years, a business relationship with the RSE licensee or any of the trustees within a RSE licensee that comprises individual trustees, which is considered to be material to either the RSE licensee or the person. [Schedule 1, Part 1, item 1, paragraph 87(1)(d)]

1.60               When determining circumstances that may be considered to be ‘material’, the RSE licensee would be expected to consider the effect on the other person if the business relationship was to cease for example, they would lose a significant portion of their revenue. APRA’s prudential standards in respect to the operation of new Part 9 are expected to set out requirements for RSE licensees in this respect.

Example 1.4  

Bubbles Stationery Ltd provides services to the RSE licensee of LW&J Super with all their office equipment. The value of these services to the RSE licensee is insignificant, amounting to less than 0.01 per cent of their operations. However, the value of the provision of office equipment to Bubbles Stationery Ltd’s ongoing business operations represents a significant proportion of their annual turnover (amounting to 35 per cent).

Given the business relationship between Bubbles Stationery Ltd and the RSE licensee would be considered to be material to Bubbles Stationery Ltd, none of the Bubbles Stationery Ltd’s directors or executive officers would be considered to be independent if they were appointed to LW&J Super Fund’s board.

1.61               In addition, APRA’s outsourcing prudential framework (currently reflected in Prudential Standard SPS 231 Outsourcing and Prudential Practice Guide SPG 231 Outsourcing) includes a concept of materiality in the context of the business activities of the RSE licensee. Given that RSE licensees have been required to give consideration to questions of materiality for an extended period of time under the current prudential framework and the previous operating standard, RSE licensees should have a working knowledge of the concept of materiality in this context already.

1.62               Whether a business relationship is ‘material’ or not will depend on the circumstances of each case. However, the types of business activities that the RSE licensee may consider form the basis of a material relationship include administration, investment management functions under a formal agreement, internal audit, insurance, business continuity planning arrangements and arrangements with financial planners, particularly where the advice relates only to a member’s interest in the RSE.

Example 1.5  

Where an actuary is retained to provide advice on a single, specific funding issue in relation to defined benefit members within an RSE licensee’s business operations, it would be open to an RSE licensee to consider this relationship to not be a material business relationship because the engagement is for a limited time and a limited scope (in terms of the issue and in terms of the overall impact on the fund).

Example 1.6  

The administrator of the RSE licensee would generally be considered a material service provider because administration is core to the operations of the RSE licensee. Another example is an externally-provided internal audit function.

1.63               The Bill also provides that a person will not be independent in the following specific situations if they are, or have been in the preceding three years, a director or executive officer of:

•        an employer-sponsor who employs 500 or more members of the fund); or

•        an organisation representing the interests of one or more employer-sponsors of the fund, or the members of the fund, that has the right to appoint or nominate for appointment, directors or trustees of the RSE licensee. [Schedule 1, Part 1, item 1, paragraph 87(1)(f)]

1.64               This exclusion is designed to ensure that an independent director is not closely aligned with any of the sponsoring parties who have rights to nominate or appoint directors of the RSE licensee.

1.65               To ensure flexibility to address future developments in the superannuation industry, the Bill provides for regulations to be made that could specify other circumstances that would result in a person not being independent. [Schedule 1, Part 1, item 1, paragraph 87(1)(g)]

1.66               A regulation making power has also been included to determine circumstances in which a person is considered independent regardless of the circumstances in new section 87(1). This provision has been included to address possible structures or relationships that may emerge in the superannuation industry and may mean a person could be considered independent even though they might otherwise be captured by new section 87(1). Having a regulation making power will enable the Government to provide certainty to the industry without having to amend the SIS Act. [Schedule 1, Part 1, item 1, subsection 87(3)]

1.67               This will ensure that APRA is only required to exercise its power in individual, exceptional or urgent circumstances rather than in more common scenarios which may impact on a wider number of participants.

APRA determinations

Determination as to whether a person is independent

1.68               To support the Government’s proposed reforms, the Bill provides APRA with the power to make determinations as to whether a person is independent or not independent of an RSE licensee. [Schedule 1, Part 1, item 1, subsection 87(4)]

1.69               This is intended to allow APRA to respond to situations where a person’s circumstances and his or her capacity to exercise independent judgement is clear but for reasons such as timing, restructures and mergers and acquisitions.

Example 1.7  

A person may not be considered independent under the new section 87, because they only ceased being employed by the RSE licensee 2 years and 11 months ago (that is, not the full three year period required by new section 87 to make a former employee independent). An RSE licensee can apply to APRA under new section 89 to make a determination that such a person is independent. In this situation if APRA is of the view the person’s capacity to exercise independent judgement is clear, but for that person’s lack of separation from the RSE licensee for the full three years, APRA may, under new section 88, make a determination that the person is independent.

1.70               An RSE licensee can apply to APRA under new section 89 to make a determination that a person is independent. Where APRA is reasonably satisfied that the person is likely to be able to exercise independent judgement in performing the role of director (or individual trustee) they will determine the person is independent. [Schedule 1, Part 1, item 1, subsection 88(1)]

1.71               One situation where this power might be used is where a person’s circumstances mean that they do not meet the independence requirements, but that they are considered to be capable of exercising independent judgement.

Example 1.8  

A director on an RSE licensee board is also a director on the board of another RSE licensee operating within the same financial conglomerate group. As these two RSE licensees are related bodies corporate under sub-paragraph 87(1)(c)(ii) , the director cannot sit on either board as an independent director. Either RSE licensee could apply to APRA under section 89 for a determination under section 88 that the director is capable of exercising independent judgement in these circumstances. In this example, the RSE licensee could seek a determination from APRA on the grounds that the two RSE licensees are not in competition with each other.

In addition, an RSE licensee might form the view that a person could be considered independent on the RSE licensee board, despite section 87, where this person is a director or executive of an employer sponsor that has 510 employee members in the fund and the fund as a whole has 500,000 members. In this example, a decision by the employer sponsor to change funds would not have a significant impact on the overall number of members in the fund as employee members of the fund represent 0.1 per cent of overall fund membership.

1.72               APRA through new section 90 can also make a determination that a person is not independent where they are reasonably satisfied that the person is unlikely to be able to exercise independent judgement in the role.

1.73               One situation where this power might be used is where a director appears to meet the independence requirements but APRA forms the view on the basis of relevant information that there are circumstances in relation to the director, such as the presence of a familial or other personal relationship with a person who would not be considered independent under new section 87, that may limit their ability to exercise the necessary independent judgement.

1.74               Determinations under new sections 88 and 90 are reviewable decisions. This means that a person affected by such a decision can request APRA to reconsider the decision as well as seek review by the Administrative Appeals Tribunal under section 344 of the SIS Act. [Schedule 1, Part 2, item 6, subsection 10(1)]

1.75               To ensure that the policy intent of new Part 9 is reflected in APRA’s determination of whether a person is independent, APRA must take into consideration the extent to which the circumstances relating to a person’s independence in new paragraphs 87(1)(a) to (g) and subsection 87(3) do not apply to the person. [Schedule 1, Part 1, item 1, subsection 88(2)]

Example 1.9  

It is unlikely that an RSE licensee would be able to form a view that a person is independent where that person is a partner in the audit firm that currently undertakes the external audit for the RSE licensee’s business operations, even if they are not directly involved in the audit itself.

1.76               APRA is required to give written notice of any such determinations, or, if it refuses an application, of the reasons for refusing the application. [Schedule 1, Part 1, item 1, subsection 88(3)]

1.77               Any such determination will take effect on the day it is made, and ceases to have effect if APRA makes a determination under new section 90 that the person is not independent. [Schedule 1, Part 1, item 1, subsection 88(4)]

Application for a determination under new section 89

1.78               New section 89 provides RSE licensees with the ability to apply to APRA for a determination that a particular person is independent for the purpose of complying with new Part 9. [Schedule 1, Part 1, item 1, section 89(1)]

1.79               When APRA receives an application for a determination, it may give the RSE licensee notice requesting further information required to make the determination. [Schedule 1, Part 1, item 1, subsection 89(2)]

1.80               APRA must make its determination within 60 days, extendable by a further period of 60 days, provided APRA informs the RSE licensee and the extension is made within the initial 60 day period. [Schedule 1, Part 1, item 1, paragraph 89(3)(a), subsections 89(4) and (5)]

1.81               APRA may request additional information in writing from the RSE licensee. In that case, the initial 60 day period only starts when APRA receives the information requested. [Schedule 1, Part 1, item 1, subsection 89(2) and paragraph 89(3)(b)]

1.82               A failure by APRA to make a decision that a person is independent is equivalent to a refusal of the application. [Schedule 1, Part 1, item 1, subsection 89(6)]  

1.83               The provisions in the new subsection 89(6) are similar to ARPA’s powers in the context of RSE licensing and the authorisation of MySuper products. APRA is expected to be in regular contact with the affected entity where it is unable to make a determination within the required time. APRA’s experience is that it is highly unusual for applications under these other provisions in the SIS Act not to be dealt with within the time period for dealing with applications. If the circumstance arises where the time period expires, the affected entity will not be prevented from reapplying.

Determination as to whether a person is not independent 

1.84               New section 90 allows APRA to determine that a person is not independent if it is reasonably satisfied that the person is unlikely to be able to exercise independent judgement in performing the role of director (or individual trustee). [Schedule 1, Part 1, item 1, subsection 90(1)]

1.85               To ensure that the policy intent of new Part 9 is reflected in APRA’s determination of whether a person is unlikely to be able to exercise independent judgement, APRA must take into consideration the extent to which the circumstances relating to a person’s independence in new paragraphs 87(1)(a) to (g) and subsection 87(3) do not apply to the person. That is, APRA must take account of the criteria that would prevent a person from being considered independent in making this determination. [Schedule 1, Part 1, item 1, subsection 90(2)]

1.86               APRA has indicated that it envisages using this power rarely. This is because the definition of independent in new section 87(1) is expected to provide the superannuation industry with sufficient certainty when deciding whether a person is eligible to be appointed as an independent director on an RSE licensee’s board. Further, RSE licensees will be encouraged to consult with APRA where there is any doubt about the independence of a potential director. This consultation can be undertaken formally by RSE licensees under new section 89 of the SIS Act.

1.87               APRA may specify in a determination that the person is not considered to be independent for a particular period. In such a case, the determination of non-independence ceases when the period ends or when a determination under new section 88 is made that the person is independent for the purpose of new Part 9 (refer above, example 1.7). [Schedule 1, Part 1, item 1, subsections 90(3) and (6)]

1.88               In making a determination, APRA must give the RSE licensee written notice including the reasons for making the determination. [Schedule 1, Part 1, item 1, subsection 90(5)]

1.89               A determination made in relation to whether a person is not independent takes effect on the day the determination is made. [Schedule 1, part 1, item 1, subsection 90(4)]

1.90               If the determination from APRA is made for a fixed period under new subsection 90(3), the expiry of that period does not on its own result in the person becoming independent. [Schedule 1, Part 1, item 1, subsection 90(7)]

Replacing independent directors

1.91               In case of a vacancy, new section 91 provides RSE licensees with 120 days to replace an independent director. [Schedule 1, Part 1, item 1, section 91]

1.92               The provision deems an RSE licensee to be in compliance with the requirement to have one-third independent directors if there is a vacancy, as long as the RSE licensee was complying with the requirements immediately before the vacancy arose and is in compliance with the requirements as soon as the vacancy is filled.

1.93               This also covers situations where there are multiple vacancies. At the time of the first vacancy, new section 91 would deem an RSE licensee to be in compliance with the requirement to have one-third independent directors for 120 days. If a second vacancy arises within the 120 days before the vacancy is filled, the RSE licensee still meets the requirements under new section 91 because it will be deemed to have complied with the requirements immediately before the second vacancy arose (as long as that first vacancy is ultimately filled within 120 days).

Example 1.10  

Adam and Bev are both independent directors of an RSE licensee that is a corporate trustee.

The RSE licensee complies with section 86. From 1 March, Adam is no longer a director and the RSE licensee has 120 days to replace him. During this time the RSE licensee is considered to be complying.

From 1 May, Bev is no longer a director and the RSE licensee has 120 days to replace her. The fact that the RSE licensee has two vacancies for independent directors does not cause it to fail to comply with section 86, provided it complies with section 86 immediately after each of the vacancies is filled. That is, it must replace Adam with a new independent director by 28 June, and Bev with a new independent director by 28 August, in order to remain in compliance with section 86.

APRA directions and compliance

1.94               New section 92 allows APRA to issue a direction to an RSE licensee to comply with Part 9. Such a direction has to be accompanied by a statement giving reasons for issuing the direction. The direction may be given if the licensee contravenes a Part 9 provision, on one or more occasions, and APRA is satisfied that the direction is warranted by the seriousness or frequency of the contravention. [Schedule 1, Part 1, item 1, subsections 92(1) and (2)]

1.95               In addition, APRA may revoke a direction to a trustee if it is satisfied that the RSE licensee is substantially in compliance with Part 9. [Schedule 1, Part 1, item 1, subsection 92(3)]

1.96               Due to the serious nature of such a contravention, a failure to comply with such a direction without a reasonable excuse is a strict liability offence with a penalty of 60 units. The defences for strict liability offences are provided in section 6.1 of the Criminal Code. [Schedule 1, Part 1, item 1, subsections 92(4) and (5)]

1.97               Strict liability is appropriate in these circumstances to ensure the integrity of the new regulatory regime applying to the governance of RSE licensees. The penalty provided is similar to that provided in the SIS Act for breach of a direction from APRA to comply with a licence condition.

1.98               APRA must be able to respond swiftly where the new governance requirements are being breached in a deliberate, sustained or serious manner. The imposition of strict liability is therefore likely to significantly enhance the effectiveness of APRA’s oversight of the new requirements.

1.99               The imposition of strict liability for the offence in section 92 of the Bill satisfies the principles set out in the guidance provided by the Attorney-General’s Department. The offence is not punishable by imprisonment, but by a fine and the level of the fine is capped at the recommended 60 penalty units.

1.100           A strict liability offence is not automatically triggered by a failure to appoint sufficient independent directors. For the strict liability offence to be triggered APRA would first have to make a direction requiring the RSE licensee to comply and the RSE licensee would have to fail to comply with that direction without having a reasonable excuse for failing to do so.

1.101           As a further safeguard, APRA must be satisfied that a direction is warranted because of the seriousness or frequency or both of the contraventions committed by the RSE licensee before issuing a direction. The direction would also have to include, or be accompanied by, a statement of reasons to ensure the RSE licensee is fully aware of APRA’s concerns.

1.102           New section 93 states that breaching a provision of Part 9 is not an offence, other than as set out in subsection 92(4). However, any contravention may result in a direction from APRA not to accept any contributions made by an employer-sponsor under section 63 of the SIS Act. This replicates the provision for a breach under the previous Part 9. [Schedule 1, Part 1, item 1, section 93]

Acting trustees

1.103           Part 9 does not apply in circumstances where an acting trustee has been appointed under Part 17 of the SIS Act. [Schedule 1, Part 1, item 1, section 93A]

1.104           At times, pursuant to section 134 of the SIS Act, it is necessary for APRA to appoint an acting trustee to a superannuation entity; for example, where the trustee of the entity is either suspended or removed. Subject to the conditions of appointment, the role of the acting trustee is to exercise the functions and duties of a trustee in relation to the superannuation entity until such time as a permanent trustee takes over control of the entity or the entity itself is wound up.

1.105           It is appropriate that the new governance requirements do not apply to acting trustees. This is because acting trustees are seen as an interim measure and are not intended to act in a permanent trustee capacity. The previous Part 9, which is being repealed, did not apply to Part 17.

Facilitating compliance with the new governance arrangements

1.106           New section 93B provides that the requirements set out in Part 9 for independent directors override any contradictory provisions in trust deeds and other rules governing a regulated superannuation fund, including the constitution of a corporate trustee or any other documentation that imposes requirements on the RSE licensee relating to the appointment of directors or trustees. [Schedule 1, Part 1, item 1, section 93B]

1.107           It is anticipated that most RSE licensees will amend their trust deeds or constitutions to insert provisions to enable them to comply with the requirements for independent directors before the three year transition period concludes.

1.108           As new section 93B will only become operative three years after the Bill receives Royal Assent, it will not be available to RSE licensees during the transition period. However, a similar provision has been provided in the transitional provisions that will be applicable during the three year transition period. [see Schedule 1, Part 3, item 25]

Consequential amendments

1.109           The entry in the table in section 4 of the SIS Act relating to Part 9 is updated to reflect its new contents relating to governance arrangements for regulated superannuation funds. [Schedule 1, Part 2, item 2]

1.110           The definitions of ‘employer representative’, ‘independent director’, ‘independent trustee’, ‘member representative’ and ‘policy committee’ in section 10 of the SIS Act are repealed as they relate to the equal representation regime that is being repealed. [Schedule 1, Part 2, items 3 and 5]

1.111           A new definition of ‘independent’ is inserted in section 10, referring the reader to new sections 87, 88 and 90 in Part 9 of the SIS Act. [Schedule 1, Part 2, item 4]

1.112           In the definition of ‘reviewable decision’ in section 10, existing paragraphs (m) to (nc) are removed. These are decisions made under the former equal representation regime that is being repealed.

1.113           Two new reviewable decisions are inserted, being a decision by APRA to refuse to make a determination under new section 88 that a person is independent, and a decision under new section 90 that a person is not independent. [Schedule 1, Part 2, item 6]

1.114           A new definition for ‘shareholding interest’ is inserted in subsection 10(1) that is deemed to have the same meaning as in the Income Tax Assessment Act 1997 . [Schedule 1, Part 2, item 7]

1.115           Subsection 10(2) of the SIS Act is repealed. This subsection relates to the definition of ‘independent director’ in the context of the equal representation rules. [Schedule 1, Part 2, item 8]

1.116           The notes in section 29C of the SIS Act are amended to refer to the new requirements in Part 9 to have at least one-third independent directors. [Schedule 1, Part 2, items 9 and 10]

1.117           Subsection 29EA(4) is repealed as it refers to section 92 that is being repealed. This subsection clarifies that APRA may, under subsection 29EA(1), impose a licence condition on a fund to comply, or class of funds, specified in the condition must comply with the alternative agreed representation rules whenever section 92 applies to the fund. [Schedule 1, Part 2, item 11]

1.118           Subsection 63(6) dealing with contraventions of Part 9 of the SIS Act is amended to take account of the new regime in that Part. The heading and the contents of the subsection now refer to the new independence requirements imposed on trustees and directors, and not to equal representation rules. [Schedule 1, Part 2, item 12 and 13]

1.119           The heading in subsection 63(6) is repealed and replaced with a new title ‘Contravention of rules relating to independent directors and trustees’. [Schedule 1, Part 2, item 13]

1.120           Subsections 63(7B), (7C) and (7D) of the SIS Act dealing with breaches of the former equal representation rules are repealed. [Schedule 1, Part 2, item 14]

1.121           Subsection 63(8) is amended to remove the reference to subsection 63(7B) as that provision relates to breaches of the former equal representation rules that are being repealed. [Schedule 1, Part 2, item 15]

1.122           Section 107 is repealed as that provision relates to the equal representation rules that are being repealed. This section applies duties to the trustees of employer sponsored funds to establish procedures for appointing member representatives when those trustees are required by law to have member representatives. [Schedule 1, Part 2, item 16]

1.123           Section 108 is repealed as that provision relates to the equal representation rules that are being repealed. Subsection 108(1) provides that, where a standard employer sponsored fund relies on subsection 89(2) (which is being repealed) to comply with the equal representation provisions, then the additional duties in subsection 108(2) apply to trustees of the fund. Subsections 108(3) and (4) are the attached offence provisions. [Schedule 1, Part 2, item 16]

1.124           Section 117 of the SIS Act sets out circumstances in which amounts may be paid out of an employer-sponsored fund to an employer-sponsor. A number of changes are required to reflect the removal of the equal representation rules in Part 9 of the SIS Act.

1.125           Subparagraphs 117(5)(b)(i) and 117(5)(b)(ii) are repealed and replaced by new subparagraphs that reflect the changed requirements for composition of boards. The existing subparagraphs required that a resolution must be passed by equal numbers of employer and member representatives on boards of trustees or among groups of individual trustees. [Schedule 1, Part 2, item 17]

1.126           Subsection 117(9) is repealed as it makes provision for situations where additional independent trustees or directors have been appointed to equal representation trustee groups or boards. [Schedule 1, Part 2, item 18]

1.127           Paragraphs 223A(1)(f) and (g) relating to breaches of repealed sections 107 and 108 are repealed. [Schedule 1, Part 2, item 19]

1.128           Subparagraph 312(1)(a)(iv) of the SIS Act is repealed. It incorporates an ‘absence of a quorum at a meeting of members of a policy committee’ in the definition of procedural irregularity, relating to provisions under former Part 9 that are being repealed in this Bill. [Schedule 1, Part 2, item 20]

1.129           Paragraph 327(1)(d) of the SIS Act is repealed. It provides that subsections 63(7B), (7C) and (7D) of the SIS Act are ‘modifiable provisions’ as defined in the Act. However, these three subsections are being repealed in this Bill. [Schedule 1, Part 2, item 21]

1.130           Subsection 327(1) is amended to include the transitional provisions as ‘modifiable provisions’ under the SIS Act. [Schedule 1, Part 2, item 22]

Transitional provisions

1.131           Part 3 of the Bill provides transitional provisions. APRA will be making prudential standards that will prescribe transition arrangements to compliance with the new Part 9 of the SIS Act before the end of 2015. During the transition period, RSE licensees will need to comply with these prudential standards.

1.132           Where an RSE licensee complies with the transitional requirements during the transition period neither the new governance provisions in Part 9 of the SIS Act nor the current provisions in Part 9 of the SIS Act will apply during this period. [Schedule 1, Part 3, item 24, subsection 24(1)]

1.133           During the transition period item 25 provides that the transitional prudential standards override any contradictory provisions in trust deeds and other rules governing a regulated superannuation fund, including the constitution of a corporate trustee. [Schedule 1, Part 3, item 25]

1.134           This provision replicates the provision in the new section 93B in schedule 1, Part 1, item 1. It is required during the transition period to allow RSE licensees time to amend their trust deeds or constitutions because new section 93B will not take effect until the end of the transition period.

1.135           In addition, APRA will have the power to modify these transitional provisions to ensure that they do not have any unintended effects, or to provide relief to RSE licensees as required. The transitional rules are defined as ‘modifiable provisions’ which can be amended by APRA.

1.136           The transition period is defined as a period of three years from the date of Royal Assent to the Bill. [Schedule 1, Part 3, item 23]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Superannuation Legislation Amendment (Trustee Governance) Bill 2015

Schedule 1: Governance arrangements for registrable superannuation entities

1.137           This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

1.138           The Bill makes amendments to the Superannuation Industry (Supervision) Act 1993 to require trustees of registrable superannuation entities that are regulated superannuation funds, including standard employer-sponsored fund to have at least one-third independent directors and an independent chair.

Human rights implications

1.139           This Bill does not engage any of the applicable rights or freedoms.

Conclusion

1.140           This Bill is compatible with human rights as it does not raise any human rights issues.



Chapter 2          

Regulation impact statement : Schedule 1: Governance arrangements for registrable superannuation entities

Background

2.1                   The size of the superannuation savings pool in Australia is currently $2.05 trillion [1] and is expected to grow to approximately $9 trillion by 2040. [2] While compulsory superannuation has been in existence since 1992, its significance in Australia’s financial system has increased rapidly in recent years as the pool of savings continues to grow and questions about its efficiency are raised in broader economic discussions.

2.2                   The Australian Prudential Regulation Authority (APRA) has prudential oversight of the superannuation system along with the Australian Securities and Investments Commission (ASIC) which regulates the conduct and disclosure obligations of financial services providers (including superannuation trustees that hold an Australian financial services licence). The Australian Taxation Office has responsibility for the oversight of self managed superannuation funds (SMSFs).

2.3                   In its superannuation statistical data, APRA groups superannuation funds into several categories: corporate (38 funds), retail (147 funds), public sector (19 funds), industry (not-for-profit) (44 funds) and small (550,706 funds). [3] Superannuation funds are generally regulated by both the Superannuation Industry (Supervision) Act 1993 (SIS Act) and the Corporations Act 2001 (and related regulations, along with APRA prudential standards). [4]

2.4                   In 2009, a review was commissioned to examine and analyse the governance, efficiency, structure and operation of Australia’s superannuation system, which was led by Jeremy Cooper (the Cooper Review). It specifically examined both compulsory and voluntary aspects of superannuation and the governance, efficiency, structure and operation of the system. The Cooper Review was aimed at boosting the retirement savings of all Australians by increasing efficiencies, reducing costs and fees and in turn lifting long-term rates of return.

2.5                   The Cooper Review recommended that the SIS Act be amended so that it is no longer mandatory for trustee boards to maintain equal representation in selecting its directors. The Cooper Review also noted that the presence of independent directors on boards is best practice in corporate governance. [5]

2.6                   In September 2013, the then Opposition committed to improve governance in superannuation through the appropriate provision of independent directors on superannuation trustee boards. [6]

2.7                   In 2014, the FSI in its Final Report recommended mandating a majority of independent directors on the board of corporate trustees of public offer superannuation funds, including an independent chair.

2.8                   The FSI noted that ‘including independent directors on boards is consistent with international best practice’ and that independent directors ‘improve decision making by bringing an objective perspective to issues’ and ‘hold other directors accountable for their conduct’.

The problem

2.9                   The Government is seeking to deliver on its superannuation governance election commitment (election commitment) to align governance in superannuation more closely with the corporate governance principles applicable to ASX listed companies. In particular, the Government is seeking to increase the level of independence in superannuation funds to ensure improved member outcomes, while minimising the costs to the superannuation industry.

2.10               The Cooper Review and the FSI into the Financial System both concluded after their consultations with the superannuation industry representatives that superannuation funds would benefit from having independent directors. In particular, the FSI identified overseas research, which suggested, ‘good governance adds one percentage point to pension fund returns’. [7] The superannuation industry representatives have also indicated that stronger board performance, which could be achieved through increased independence, can have a direct impact on the returns superannuation funds achieve for their members.

2.11               Currently, it is estimated that of only 49 per cent of industry, corporate and public sector funds have one or more independent directors (leaving 51 per cent of funds without any independent directors). Considering the current average board size of these particular funds is estimated to be nine members it can be concluded that independence is lacking across these superannuation funds.

2.12               In a 2015 report by Australian Institute of Company Directors, which considered the views of 100 Chairs covering organisations in the publicly listed, private, not-for-profit and public sectors, consideration was given to the factors that were required for good governance. The report indicated that the past focus on structural aspects of governance has not helped reduce the occurrence of corporate errors, omissions and malfeasance. Instead it was considered that the critical factors required for ensuring good governance were trust; independence of mind; and diversity of worldview.

2.13               In this regard, independence of mind and responsibility are at the core of the case for independence. Current APRA guidance references a number of key principles underpinning a sound and effective governance framework for superannuation boards one of which is ‘responsibility — the board of directors is ultimately responsible and accountable for the decisions and actions taken by a registrable superannuation entity (RSE) licensee’.

2.14               Included among the SIS Act covenants required to be included in the governing rules of superannuation trustees, are covenants to:

•        perform the trustee’s duties and exercise the trustee’s powers in the best interests of the members;

•        exercise the same degree of care, skill and diligence as a prudent superannuation trustee (or prudent superannuation entity director) would exercise in relation to an entity of which it is the trustee and on behalf of the members;

•        act fairly in dealing with classes (or members in a class) of members; and

•        act honestly in all matters concerning the entity.

2.15               These covenants are aimed at ensuring superannuation boards and directors act responsibly.

2.16               Historically, superannuation boards have generally acted in the best interests of their members in line the above covenants, irrespective of whether they have one or more independent directors. However, this is not always the case. In this regard, in 2009, Trio Capital collapsed, leaving around 6,100 investors with losses amounting to $176 million. The majority of the loss was due to the failure to not fully investigate the accuracy of falsified valuations and fictitious returns in overseas hedge funds, as well as failure to adequately investigate the risks associated with the investment. APRA reviewed governance failings within Trio Capital, and identified a lack of independent directors in the Trio Capital funds, which were APRA regulated superannuation funds.

2.17               The liquidator of the failed Trio Capital entities concluded that the directors did not take reasonable steps to ensure that Trio was complying with its obligations as responsible entity, did not exercise appropriate duty of care as officers, did not act in the best interests of the managed investment scheme into which the Trio Capital superannuation funds had invested, and did not comply with statutory and fiduciary responsibilities to avoid conflicts of interest.

2.18               It is also important to note that APRA has on occasion disqualified directors under section 120A(2) of the SIS Act. Some of the decisions to disqualify directors have been made because APRA formed the view that the director failed to exercise a reasonable degree of care and diligence in ensuring that RSE licensee carried out its duties under the SIS Act.

2.19               On 25 August 2015, in an Australian Financial Review article the link between improved independence and improved decision making through the context of the FSI was clearly captured.

Financial system inquiry head David Murray said independent directors were ‘more likely to ask the right questions’ if a board needed to pit hard-nosed economic decisions against ideology … funds should have a majority of independent directors and an independent chair. ‘The point about independent directors is that they can examine in a dispassionate way if policies are in the interests of members or for other reasons,’ ... ‘That is very helpful. Independent directors are more likely to ask the right questions of where the interests of members lie, if there are enough of them.’ [8]

2.20               Increasing independence can also be seen to bring diversity in worldview to a board’s decision making processes. A diverse worldview enables the decision making processes of superannuation boards to be tested and challenged in a way that achieves beneficial member outcomes and feeds back into the above covenants.

2.21               However, the current equal representation model, which has existed since 1993, significantly affects the current the level of independence of mind and diversity of worldview obtained through the inclusion of definition of an independent director as currently defined in section 10 of the SIS Act.

2.22               Section 10 provides that an ‘independent director’ in relation to a corporate trustee of a fund, means a director of the corporate trustee who:

•        is not a member of the fund;

•        is neither an employer-sponsor of the fund nor an associate of such an employer-sponsor;

•        is neither an employee of an employer-sponsor of the fund nor an employee of an associate of such an employer-sponsor;

•        is not, in any capacity, a representative of a trade union, or other organisation, representing the interests of one or more members of the fund; and

•        is not, in any capacity, a representative of an organisation representing the interests of one or more employer-sponsors of the fund.

2.23               Equal representation as currently contained in the SIS Act prevents changes to the number of independent directors on some superannuation trustee boards. [9] Under the SIS Act, funds operating under the equal representation model are only able to appoint one independent director. In practice however, funds have the ability to apply to APRA to appoint more than one independent director. [10] Not-for-profit funds and corporate funds typically operate under equal representation arrangements, although some have an independent director on the Board.

2.24               In contrast to directors representing employers or employees under the equal representation model independent directors are free of the types of conflicts that may cause them to deliberately or unconsciously serve the interests of a related party or a subset of members, rather than the fund’s entire membership.

•        Independent directors of superannuation funds are not influenced by:

-                  parent companies, such as an insurance company or bank;

-                  sponsoring organisations, such as a union or employer organisation;

-                  service providers, such as an administrator; or

-                  subsets of the membership of the fund, such as those fund members who are also a member of the sponsoring union.

2.25               The FSI also indicated that the equal representation model is less relevant in the current superannuation system, which predominantly consists of public offer accumulation funds and funds less focused on single employers.

… fund members exercise choice, directors appointed by employer and employee groups are less likely to represent the broader membership of public offer funds (see Recommendation 12: Choice of fund). Given the diversity of fund membership, it is more important for directors to be independent, skilled and accountable than representative.

2.26               Given the importance of independence of mind and diversity of worldview as expressed by Chairs, under the SIS Act and eminent academics, increasing independence is key to improving governance in the superannuation system, thus improving member outcomes.

The situation the Government’s election commitment is addressing

2.27               Superannuation funds regulated by APRA are structured with trustee arrangements — there is a separation between members and trustees, with trustees managing funds on behalf of members.

2.28               A longstanding feature of the superannuation governance framework is the requirement for some superannuation trustee boards to have equal representation (typically not-for-profit and corporate funds). [11] This reflects the position adopted with the commencement of occupational superannuation, that members should have a greater voice through representation on non-public offer funds (industry, corporate and public sector). Equal representation allowed both stakeholder groups (employers and employees) to have oversight and responsibility for funds’ operations.

2.29               Most APRA-regulated funds are public offer funds, which also receive contributions from standard employer sponsors; that is, some members may choose to join the fund by direct arrangement with the trustee, while others join because of an arrangement between their employer and the trustee. In those cases, there may be an independent trustee, but for certain groups of members drawn from a single employer, the trustee must have in place advisory policy committees that must comprise equal representation of the both the employer sponsor and that group of members. Policy committees are not required in cases where the trustee board has equal representation.

2.30               The Cooper Review examined the equal representation model and found that although it was an important part of the governance structure twenty years ago, ‘changes in the industry over time and certain implementation practices mean that equal representation no longer seems to achieve its original … objective’. [12] In addition, the Cooper Review articulated the issues with governance in superannuation in these terms:

Trustee governance structures have not kept up with developments in the industry. There have also been difficulties for trustees and their trustee - directors in understanding what is expected of them and, as the industry consolidates, conflicts of interest and conflicts of duty arise regularly. Good trustee governance is fundamental to enhancing members’ retirement incomes. [13]

2.31               The Cooper Review recommended that the SIS Act be amended so that it is no longer mandatory for trustee boards to maintain equal representation in selecting its directors. The Cooper Review also noted that the presence of independent directors on boards is best practice in corporate governance. [14]

2.32               In 2014, the FSI, in its Final Report, recommended mandating a majority of independent directors on the board of corporate trustees of public offer superannuation funds, including an independent chair. The FSI noted that ‘including independent directors on boards is consistent with international best practice’ and that independent directors ‘improve decision making by bringing an objective perspective to issues’ and ‘hold other directors accountable for their conduct’. [15]

2.33               In addition, there is currently an inconsistency in the governance frameworks (including self-governing guidelines) on the number of independent directors and the definitions of independence between retail and not-for-profit superannuation fund boards.

2.34               For example, Financial Services Council (FSC) member entities (retail funds) have no restrictions in appointing independent directors and from 1 July 2014, are required, under FSC’s self-governing standard, to have a majority of independent directors and an independent chair.

The case for Government action

2.35               Given superannuation funds are expected to increase in significance and size, Australia’s superannuation governance framework must be strengthened to ensure a stable and efficient system that improves the wellbeing of all Australians.

2.36               In this regard, strong governance arrangements ensure that fund members’ interests are paramount in the minds of trustees. The trustee (and its directors) has fiduciary obligations to members and beneficiaries, which require taking ultimate responsibility for the fund and an obligation to manage the assets of the fund with competence, diligence, prudence and honesty.

2.37               In September 2013, the then Opposition published The Coalition’s Policy for Superannuation in which it committed to improving standards and better management of conflicts of interest by aligning corporate governance in superannuation more closely with the corporate governance principles applicable to ASX listed companies. The Coalition committed to improving superannuation governance by ensuring that there is an appropriate provision for independent directors on superannuation fund boards. The Coalition also noted that the Cooper Review questioned the financial expertise and professionalism of union and employer trustees appointed to superannuation boards through the ‘equal representation model.’

2.38               The Government’s election commitment seeks to build on recent reforms, which were designed to ensure that the superannuation system is primarily focused on operating in members’ best interests. [16]

2.39               On 28 November 2013, the Government released the Better regulation and governance, enhanced transparency and improved competition in superannuation discussion paper to consult on its superannuation election commitments. The discussion paper provided stakeholders with an opportunity to comment on possible reforms to governance regulations and the outcomes of that consultation are reflected in the analysis of options in this statement.

2.40               The analysis in this statement is mindful of the need for an appropriate regulatory framework for the superannuation system as a whole, one that protects the interests of members, supports the efficient allocation of savings and one that is not overly burdensome and costly to administer.

Objectives of Government action

2.41               The Government through its election commitment is seeking to ensure that superannuation fund boards have increased levels of independence, as having appropriate provision of independent directors on superannuation trustee boards is seen as a vital step towards strengthening the superannuation system.

2.42               In particular, the Government considers that independent directors provide an external, dispassionate perspective, enabling boards to benefit from a diversity of views and provide a check on management recommendations. By being free from relationships that could materially interfere with their judgement, they can provide an objective assessment of issues.

2.43               The objective of the Government’s election commitment is to:

•        set a minimum standard, in terms of the number of independent directors on superannuation trustee boards, to promote good governance through the broadening of a superannuation fund board’s pool of experience and expertise. In addition, independent directors allow for an increased accountability of decisions made by other directors who may have conflicting interests.

-                  A 2010 Regnan Research Report notes that the ‘empirical research from Australia and overseas lends support to the hypothesis that board independence and diversity … translate into better business performance’. [17]

•        have a common definition of ‘independence’ to minimise any ambiguity for the superannuation industry by ensuring that all APRA-regulated superannuation funds have the same requirements for determining whether a director is independent. The intent is for the definition of independence to be based on ASX principles, but adapted to the superannuation context.

2.44               The Government’s election commitment of ensuring appropriate provision of independent directors on superannuation trustee boards is consistent with both the Cooper Review’s and FSI’s recommendations (noting that the proposed Government action is not as far reaching as proposed by the FSI) on corporate governance frameworks and international best practice.

•        Both the Cooper Review and the FSI have recommended increasing independent directors on super fund boards. APRA requires a majority of independent directors for its other regulated entities banks and life insurance companies.

•        The ASX Corporate Governance Council’s Corporate Governance Principles recommend, on an ‘if not, why not’ basis, that Australian listed companies have a majority of independent directors and an independent chair.

2.45               To progress the Government’s election commitments and provide the superannuation industry with the necessary certainty and sufficient time to implement the new requirements, the Government is working towards introducing legislation into Parliament in the 2015 Spring sittings.

International comparisons

2.46               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. [18] In addition, the United Kingdom Corporate Governance Code recommends that at least half the board should comprise non-executive directors determined by the board to be independent. [19] As a result, 48 per cent of United Kingdom pension schemes have at least one independent trustee. [20]

2.47               In addition, from 6 April 2015, firms in the UK that operate group personal pension schemes or group stakeholder pension schemes have been required to set up an Independent Governance Committee (IGC) (or equivalent). It is intended that IGCs will raise an independent challenge to the providers of schemes on value for money issues. The UK Government sees this as a complement to its automatic enrolment policy of employees into workplace pension schemes, which began in July 2012.

2.48               In New Zealand, an independent trustee is a requirement for some KiwiSaver Funds (that is, non-default KiwiSaver schemes). Amongst other things, independence requires that the trustee is not connected with a promoter of the scheme. The New Zealand Superannuation Schemes Act 1989 does not have this independent trustee requirement and, therefore, non-KiwiSaver superannuation schemes (including complying schemes) have no qualification requirements attached to the role of the trustee.

2.49               KiwiSaver was regulated differently from other superannuation funds and managed funds because KiwiSaver was intended to be a long-term savings vehicle, with funds locked in until (in most cases) the age of eligibility for NZ superannuation.

2.50               In summary:

•        In Canada, multi-employer plans established pursuant to a collective agreement are governed by a board of trustees composed in accordance with the plan or collective agreement (typically equal representation — that is, that the board of a corporate trustee must consist of equal numbers of employer representatives and member representatives.

•        In the United States, multi-employer (Taft-Hartley) funds must have equal representation of employers and employees.

•        In the United Kingdom, at least one-third of trustees must be member-nominated.

2.51               It is worth noting that a corollary of the Australian Government’s policy still allows representation of employer and employee groups on superannuation boards. The composition of superannuation trustee boards, beyond the one-third independent directors prescribed, will remain at the discretion of the board (subject to any requirements set out in the constitution of the trustee and to the overarching legal requirement that board members are fit and proper and that boards have an appropriate skill mix).

2.52               This leaves open the ability for trustees to choose to enshrine equal representation (or voting rules in their constitutions). This outcome is consistent with representation on superannuation boards across Canada, the United States and the United Kingdom.

Policy Options

Summary of the recommended options

2.53               In recognition of the extensive work undertaken in the Cooper Review and the FSI, as outlined above, the following two options were considered to best implement the Government’s election commitment to ensure the appropriate provision of independent directors on superannuation trustee boards:

•        Option 1: Legislate for a minimum one-third of directors to be ‘independent’ with an independent chair, with funds reporting whether they have a majority of independent directors and if they do not, disclosing why not (that is, on an ‘if not, why not’ reporting basis). This option includes a three-year transitional period; or

•        Option 2: Legislate for a majority of independent directors with an independent chair, with a five-year transitional period (consistent with the FSI).

2.54               As a result of the cost implications of legislating for a majority of independent directors, the Government has decided that legislating one-third independent directors, including an independent chair, strikes an appropriate balance while still substantially strengthening governance arrangements.

Detailed discussion of the options to deliver on the Government’s election commitment

Option 1 (Proposed): Legislate for a minimum one-third of directors to be ‘independent’ with an independent chair, with funds reporting whether they have a majority of independent directors and if they do not, disclosing why not (that is, on an ‘if not, why not’ reporting basis). This option includes a three-year transitional period.

2.55               This option involves mandating that a minimum one-third of directors on superannuation fund boards be ‘independent’ with an independent chair, with an aim for a majority independent directors on an ‘if not, why not’ reporting basis (funds must disclose why they do not have a majority of independent directors). The ‘if not, why not’ basis is consistent with the approach adopted in the ASX principles for listed companies.

2.56               This option would allow the equal representation model to continue in a modified form. Boards could have the remaining two thirds split between member and employer representatives. This may result in some superannuation trustee boards incurring costs and increasing in size slightly. Costs associated with appointing at least one-third of independent directors include search and ongoing remuneration costs, as well as requirements to change trust deeds. There would also likely be increased compliance costs associated with appointing and remunerating the additional independent directors.

2.57               A transitional period of three years would minimise compliance costs, allowing existing directors to leave and new directors be appointed in an orderly fashion. Typical board appointments are for terms of three years. Given that compliance costs increase with the number of independent directors, this option is the preferred option in meeting the Government’s objective of improving superannuation governance.

2.58               Some submissions to the Government’s discussion paper Better regulation and governance, enhanced transparency and improved competition in superannuation considered that an option that required up to one-third of independent directors over an appropriate transition period would meet the Government’s objective of improving governance while considering the compliance costs on superannuation funds. The recommended governance option is estimated to cost the superannuation industry $12.3 million per year in ongoing costs and $8.5 million in start-up costs.

Option 2: Legislate for a majority of independent directors with an independent chair, with a five-year transitional period.

2.59               This option involves mandating that a majority of directors be independent, which is consistent with the requirement imposed on the banking and insurance industries by the APRA. This option is stronger than the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (ASX principles), which recommend a majority of independent directors on an ‘if not, why not’ basis. This option is also consistent with, but broader than, the FSI’s recommendation mandating a majority of independent directors and an independent chair on the board of corporate trustees of public offer superannuation funds only.

2.60               Compared to option 1, a longer transitional period of five years would help reduce compliance costs and allow existing directors to leave and new directors be appointed in a more orderly manner.

2.61               The FSI recommended mandating a majority of independent directors on the board of corporate trustees of public offer superannuation funds, including an independent chair. This option is consistent with the Inquiry’s recommendation. The Inquiry notes in its Final Report (page 134) that ‘including independent directors on boards is consistent with international best practice’ and that independent directors ‘improve decision making by bringing an objective perspective to issues’ and ‘hold other directors accountable for their conduct’.

2.62               However, this option would result in some superannuation funds (not for profit funds) being required to change their board composition markedly. There would be compliance costs associated with appointing a majority of independent directors (including search and ongoing remuneration costs, as well as requirements to change trust deeds). This option could likely result in an overall increase in the size of boards for many funds with increased compliance costs associated with appointing and remunerating the additional independent directors.

2.63               Some submissions, particularly from the retail superannuation fund sector, considered a requirement for a majority of independent directors over an appropriate transition period would meet the Government’s objective of improving governance while considering the compliance costs on superannuation funds. One submission noted that a requirement for majority independent directors was inevitable for superannuation given this is the standard for other APRA-regulated entities in the finance and insurance sector. The ongoing costs per year for option 2 are estimated to be around $23.3 million per year and start-up costs are estimated to be around $ 10.5 million.

The options for improvements to superannuation governance were formulated to consider the following issues: What is the appropriate number of directors on superannuation trustee boards?

2.64               The provision of independent directors on superannuation trustee boards is aimed at promoting board diversity and ensuring members’ best interests are front and centre. Increasing the number of independent directors on superannuation trustee boards is an issue that requires careful consideration.

2.65               Feedback from consultation (mainly from not-for-profit funds) indicated continued support for the equal representation model and opposed any requirement to mandate a proportion of independent directors.

2.66               Other submissions considered that up to one-third independent directors could be achievable with an appropriate transition period. Finally, some submissions supported a requirement for a majority of independent directors. However, the costs associated with a majority of independent directors were recognised as a potential hurdle for the superannuation industry.

2.67               The number of directors on superannuation trustee boards is not being legislated. Allowing each trustee to determine the optimal size of its board provides boards with the flexibility to appoint the directors needed to ensure the right mix of skills and experience to best serve member interests.

What should be the appropriate transition period to increase the number of independent directors on superannuation trustee boards?

2.68               Another consideration in implementing a new governance regime concerns transitional impacts on existing and new board appointments.

2.69               Feedback from submissions suggested that the transition period should differ depending on the number of independent directors required. For instance, the greater the proportion of independent directors on superannuation trustee boards, the longer the transition period should be to minimise compliance costs.

What is an appropriate definition of independence?

2.70               In considering how to improve governance in the superannuation industry through increasing the number of independent directors on superannuation trustee boards, a key issue that needs consideration is what is meant by ‘independent directors’? This is critical given the potential impacts the definition may have on the pool of independent directors. For instance, a tighter definition of independence may limit the pool of candidates, whereas a more flexible definition may widen it.

2.71               Feedback from a number of submissions indicated that if a member of a fund is a director, this gives them ‘skin in the game’ and therefore does not result in a conflict of interest. This is consistent with limited liability companies where directors can have a non-material shareholding and still be independent.

2.72               Other submissions argued that in order to achieve improvements to governance, it is important that independent directors are at arm’s length from the fund.

Impact Analysis

Impact on industry and consumers

2.73               The proposed enhancements to superannuation governance seek to improve the superannuation system while ensuring compliance costs do not outweigh potential benefits to the market and to consumers.

2.74               The proposed options are aimed at improving superannuation governance, which in turn is expected to provide benefits to fund members. In this regard, as discussed in the Problem section, the importance of independence in the decision making process can be seen through both the comments of Chairs, the SIS Act and eminent academics. However, it is recognised that while the requirement for increased independence in superannuation funds is fundamental to improving governance, and thus improving member outcomes, the full benefit of the proposed options will only be identified over the longer term. The Government’s election commitment is aimed at ensuring that the best interests of superannuation fund members are front and centre in trustees’ decision making processes.

2.75               In addition, as the vast majority of trustees of APRA-regulated superannuation funds are companies (and it is the board of trustee directors who are responsible for the trustee’s decisions and actions), these APRA-regulated superannuation funds will benefit by having a more diverse and skilled board. [21]

2.76               Community organisations and individuals more broadly are less likely to be affected directly by the governance reforms. However, all members of superannuation funds would benefit from improved governance.

2.77               The main groups affected are industry, corporate and public sector superannuation funds. These funds are the funds that will be required to restructure their boards to comply with any new independence requirements. The changes do not apply to SMSFs.

2.78               The overall compliance cost to the superannuation industry in start-up costs is estimated to be $8.5 million compared to maintaining the status quo. The overall compliance cost to the superannuation industry in ongoing costs is estimated to be around $12.3 million per year compared to maintaining the status quo. This will result in a compliance cost impact of $20.8 million in the first year and $12.3 million in subsequent years.

2.79               How superannuation funds choose to respond to the proposed reforms will depend on the individual funds. The choice of passing on costs to members or absorbing them will be made by each fund, taking into account their particular business situation and strategy.

2.80               A detailed breakdown of the cost estimate inputs cannot be publicly released as some of the data was provided on an in-confidence basis.



Table 2.1 : Governance

Governance

Minimum of one-third independent directors and an independent chair.

Majority of independent directors and an independent chair.

Start-up costs

$8.5 million

$10.5 million

Ongoing costs

(all funds, per year)

$12.3 million

$23.3 million

Board changes

Independent Director remuneration: $75,000 per annum.

Change from current Director to Independent Director $20,000.

30 per cent of boards (31 RSEs) will likely increase in size to meet the new requirements.

Independent Director remuneration: $75,000 per annum.

Change from current Director to Independent Director $20,000.

30 per cent of boards (31 RSEs) will likely increase in size to meet the new requirements.

Search costs

Newspaper advertisement: $28,000 for 20 per cent of impacted RSE licensees.

Executive search firm: $53,000 per director for 80 per cent of impacted RSE licensees.

 

Constitution, Governance rules, Trust deed and legal document changes

$14,000 x 101 RSE licensees

$14,000 x 101 RSE licensees

Notes:

1.      A transitional period of three years would minimise compliance costs and allow existing directors to leave and new directors be appointed in an organised fashion (potentially consistent with a fund’s existing board renewal strategy).

2.      Current board size is estimated to be on average between 7 to 10.

3.      Additional remuneration costs associated with a Chair (if any) are in addition to a Directors normal remuneration. As such, having an independent chair will not increase costs as the appointment of a chair and the associated costs are business as usual actions.

4.      The development of a traditional plan will align with current obligations on RSEs as such; the costs associated with a traditional plan are captured through business as usual practices.

5.      Currently, 49 per cent of the affected categories have no independent directors. As such, it is estimated that on average three independent directors will be required to be appointed. However, it is estimated that 40 per cent of the affected categories will replace existing directors with new independent directors. In this regard, it is recognised that some current directors may not be currently remunerated; as such it is estimated that 50 per cent of the existing directors will have cost impact as hiring new directors.

6.      Currently, 51 per cent of the affected categories have between one and two independent directors. As such, it is estimated that on average one independent director will be required to be appointed. However, it is estimated that 40 per cent of the affected categories will replace existing directors with new independent directors. In this regard, it is recognised that some current directors may not be currently remunerated; as such it is estimated that 50 per cent of the existing directors will have cost impact as hiring new directors.

Methodology

2.81               The primary costs incurred relate to increased remuneration costs associated with complying with the proposed independent director requirement. Other significant costs include search and engagement costs, legal costs (changes to constitutions, trust deeds etc.).

2.82               The two proposed options were costed:

•        A legislated majority of independents on superannuation trustee boards after a five-year transition period; and

•        A legislated minimum one-third of independent directors with an independent chair on superannuation trustee boards with a three year transition period.

2.83               Data used in the determination of the cost impact of the proposed options was obtained from the public and private sectors and both the retail and industry funds sector through direct consultation and through the two public consultation processes.

2.84               The following assumptions were made:

•        101 RSE licensees with an equal representation board structure (corporate, industry and public sector funds) will be affected by the requirement to have independent directors. [22]

-                  In some cases this may result in a change in the composition of boards over time (with the same board size) and in others, it may result in an increase in board size.

-                  Remuneration expenses increase when boards increase their size and/or restructure to meet the new requirements.

•        The changes in board sizes are estimated using the current average range of board sizes in the affected groups, which is between 7 and 10. The calculation for remuneration of directors was estimated to be $75,000 per annum for an independent director and an increase of approximately $20,000 when a current director is reclassified or replaced with an independent director.

•        The process for finding new independent directors is normally undertaken through executive search firms or newspaper advertising (with an additional due diligence process).

-                  Based on data from the superannuation industry, it is estimated that using an executive search firm will cost $53,000 per director for each fund. It is estimated the majority of funds will undertake this process (80 per cent).

-                  Based on data from the superannuation industry, it is estimated that newspaper advertising will cost $28,000 (which includes costs associated with due diligence) for each fund to fully implement the reforms. It is estimated that a smaller proportion of funds will undertake this process (20 per cent).

•        To ensure compliance with the new requirements superannuation funds will be required to amend their Constitutions, Governance rules and Trust deeds to reflect the new independent director requirements. [23] Additionally, other legal documentation including product disclosure statements will also need to be updated to reflect the changes to broad compositions. Based on industry data, it is estimated these changes will have an initial cost of $14,000 per superannuation fund.

•        It is recognised that new directors may also require additional training in order to understand and comply with the RSE’s governance structure and procedures in addition to other legal requirements, it is superannuation funds indicted that this training can range from $10,000 to $15,000. As such, it is estimated that affected RSE’s will face additional compliance costs of $12,500 for all new directors.

•        In the development of the costing in this Regulation Impact Statement (RIS) consultation was undertaken with key industry stakeholders. In this context, one submission received through the consultation process, indicated that the costs currently outlined in this RIS did not capture the full impact of the proposed changes in Option 1. The submission indicated that the costs outlined were significantly understated. In particular, the submission indicated that:

-              The remuneration costs associated with independent chairs were significantly higher than normal chairs, contrary to the assumption used in the costing in this RIS. This assumption was tested with other stakeholders and these stakeholders considered that the current assumption used in this RIS was more appropriate.

-              The definition adopted to determine who is considered independent would have a significant impact on the number of directors required to be appointed, thus compromising the assumptions outlined in this RIS. Further, the definition of independence adopted would also influence the pool of potential directors from which appointments may be made, thus resulting in increased remuneration costs for independent appointees. These statements are considered correct in principle. However, when tested with other stakeholders, it was indicted that it was unlikely the definition of independence if it was broadly in line with the current definition in section 10 of the SIS Act would result in a significant change in the assumptions outlined in this RIS.

Summary — Governance

2.85               In summary, option 1 is the preferred option, as it will give effect to the Government’s election commitment while minimising the cost impact on the superannuation industry.

Table 2.2 : Regulatory burden and cost offset estimate table

Average annual regulatory costs (from business as usual)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in costs

Total, by sector

$13.154

$

$

$13.154

 

Cost offset ($ million)

Business

Community organisations

Individuals

Total, by source

Treasury

$13.154

$

$

$13.154

Are all new costs offset?

ü Yes, costs are offset  * No, costs are not offset  * Deregulatory—no offsets required

Total (Change in costs — Cost offset) ($ million) = $0

The average annual regulatory costs (from business as usual) will be offset by the compliance cost savings associated with the simplification of transfer pricing records.

Specific impact on small businesses

2.86               There are 2,428 small APRA funds as at March 2015 that will be affected by the governance regime. Small APRA funds typically outsource their trusteeships to ‘trustees for hire’. [24] These trustees will need to meet the independent director obligations.

2.87               However, as these trustees frequently act for a large number of funds, the effect on individual funds should be minimal.

2.88               Self managed superannuation funds are regulated by the Australian Taxation Office and not included in the new governance regime.

Impact on Government

2.89               The impact on Government will be relatively small and non-ongoing. In the short-term, implementation costs will be incurred to draft the legislation for the proposed amendments, and to make changes to the regulations. The financial impact on APRA and ASIC of these proposals was addressed in 2010 as part of the previous government’s superannuation reforms arising from the Cooper Review.

Consultation

2.90               Soon after the 2013 election, the Government decided to progress its superannuation governance election commitment in a variety of ways, including the issuing of a public discussion paper and exposure draft legislation. To ensure the consultation process covered all relevant persons, the Government consulted in the public domain. Due to some more technical aspects of the Government’s policy, the Government also conducted targeted consultation with stakeholders.

2.91               On 28 November 2013, the Government released a discussion paper seeking industry’s views on the status of reforms covering governance and transparency. The paper was entitled ‘ Better regulation and governance, enhanced transparency and improved competition in superannuation’ . Amongst other things, the discussion paper canvassed improving trustee board governance through having independent directors on superannuation trustee boards.

2.92               A total of 90 submissions were received, including 23 confidential submissions. Consultation involved meetings, including around 14 meetings with representatives from across the superannuation sector. This consultation informed the assessment of compliance costs. Stakeholders were also engaged in further direct consultation to assist with assessment of the cost implications of the policy options.

2.93               The main themes raised by submissions were:

•        both support and concern over proposed board governance changes; and

•        the need for appropriate time to implement any legislative changes.

2.94               A number of submissions, mainly from industry funds, indicated continued support for the equal representation model and opposed the proposed requirement to mandate a proportion of independent directors. A number of industry fund submissions, including Industry Super Australia (ISA), argued that not only is Australia’s representative trustee arrangements consistent internationally, but that equal representation helps ensure that member interests come first and at the same time has delivered higher average returns and lower fees than retail funds.

2.95               In particular, the ISA opposed any requirement to have a specified proportion of independent directors on boards. ISA said that there should only be a positive obligation on boards to consider if appointing an independent chair and/or independent directors (up to one-third of total board membership) may be in the best interests of fund members.

2.96               On the other hand, the Association of Superannuation Funds of Australia (ASFA) supported some independence on boards and said that if a requirement for independent directors is mandated, at least one-third of the directors on superannuation boards should be independent with an independent chair.

2.97               Another key consideration in the discussion paper was the appropriate transition period to implement the new governance regime. Submissions suggested that the transition period should differ depending on the number of independent directors required. For instance, the greater the proportion of independent directors on superannuation trustee boards, the longer the transition period should be to minimise compliance costs. In particular, there was a range of views ranging from three years (for example, ASFA) to five years (for example, the Australian Institute of Superannuation Trustees (AIST).

2.98               An early assessment stage RIS (OBPR ID 16729) was prepared for consideration prior to the development of exposure draft the legislation.

2.99               On 26 June 2015, the Government released draft legislation to require one-third independent directors on superannuation trustee boards. Consultation closed on 23 July 2015. Thirty-one written submissions were received in response to this consultation, of which two were confidential.

2.100           In the week beginning 27 July 2015, officials from Treasury met with a wide range of stakeholders in Melbourne and Sydney to seek views on any technical issues and unintended consequences with the draft legislation.

2.101           The policy issue of independent directors is a threshold issue for some parts of the industry, with views split to some extent between retail and industry funds. For example in their submission, the ISA said, ‘the approach adopted in this draft Bill will not strengthen the governance of superannuation funds. It is misdirected, imposes rigid and inflexible regulation, intrudes into the private affairs of a corporation without a rational or compelling basis, and will undermine the representative trustee system’. The AIST submitted that the changes ‘will impose significant costs and introduce risks to the industry for no good reason. The changes also take Australia in the opposite direction to the rest of the world by removing member representation from boards of occupational-based retirement savings funds’.

2.102           Australian Super continued to raise strong reservations on the benefits of moving away from the current governance requirements, ‘the prevailing governance arrangements for industry funds have produced very strong results for fund members. The case for a mandatory proportion of independent directors has not been made on merit grounds. Indeed the empirically-based grounds for maintaining the currently successful equal representation model are very strong.’

2.103           However, a number of stakeholders did support the Government’s policy of a minimum one-third independent directors. For example, the Association of Superannuation Funds of Australia said that it ‘supports increasing the number of independent directors on the boards of superannuation funds and recognises that over the past few years many trustee boards have already taken the opportunity to supplement their skills and have appointed independent directors.’ The Financial Services Council said a ‘requirement to have independent directors and an independent chair on the boards of superannuation trustees is consistent with international best practice for corporate governance and is in the best interest of consumers. It is consistent with recommendations from the Super System Review and the Financial System Inquiry.’ Catholic Super said the ‘Government rightly considers independent directors on superannuation trustee boards as a way of strengthening the current superannuation system’. The consultations helped to refine the draft legislation to superannuation governance and informed the final assessment of compliance costs.

Conclusion

2.104           A strong and stable superannuation system is an important part of the Government’s policy program to build a stronger and more prosperous economy.

2.105           These reforms deliver on the Government’s intention to align governance structures in the superannuation system more closely with corporate governance principles applicable to ASX listed companies. Consultations revealed that while stakeholders remain polarised on the overarching policy question of whether or not independent directors should be mandated by law, the majority of parties consulted were able to move beyond this point and provide very useful views on ways to improve the robustness of the draft legislation.

2.106           The main issues arising from consultation on the draft legislation were:

•        a preference for realigning the split between the law and the powers given to the Regulator (APRA) by including more provisions in the Bill to provide greater certainty to stakeholders;

•        certainty that the length of the transition period will be three years;

•        a preference for retaining the equal representation rules contained in the current Part 9 of the SIS Act and the two-thirds voting rule; and

•        a number of technical drafting issues that will clarify the intent of the law.

2.107           These issues have been taken into account in redrafting the final Bill.

2.108           We confirm our view that option 1 is the best policy option. In contrast to option 2, that a board should have a majority of independent directors, we believe that proceeding now 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 of independent directors was mandated.

Implementation and Review

2.109           The Government intends to implement option 1 by introducing legislation into Parliament in the Spring Sittings with a commencement date of Royal Assent.

2.110           Success will be measured by how quickly superannuation trustee boards move to a minimum one-third independent directors. However, the ultimate yardstick will be at the end of the three-year transition period to assess how many trustees are compliant with the requirements. Another measurement will be how many trustees may need to use the potential relief on offer from the Australian Prudential Regulation Authority, where a bona fide effort has been made throughout transition and a compliant transition plan been lodged with APRA.

2.111           Some parties have indicated that there could be difficulties in finding sufficient number of independent trustees; however the Australian Institute of Company Directors maintains a large data base of members who are seeking board positions, many of whom would be suitable. Funds who currently have independent directors commented that they have not had any problems in finding suitable candidates.



Outline of Chapter

3.1                   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 by the end of the transition period.

3.2                   All references in this chapter are to the Governance of Australian Government Superannuation Schemes Act 2011 (Governance Act) unless otherwise specified.

Context of amendments

Background

3.3                   The Australian Government’s main civilian and military superannuation schemes come under the trusteeship of the Commonwealth Superannuation Corporation (CSC), a Registrable Superannuation Entity licensee. CSC, and the board that governs CSC (‘CSC Board’), is established by the Governance of Australian Government Superannuation Schemes Act 2011 (Governance Act).

3.4                   Schedule 2 to the Bill amends the structure of the CSC Board to comply with the new governance requirements made by the Bill. The CSC Board will also be reduced from eleven to nine directors as part of the restructure. 

Independence of directors

3.5                   To facilitate the effective operation of the amendments in Schedule 2, independent from the CSC has the meaning given by item 2 of Schedule 2 and RSE licensee has the same meaning as in the Superannuation Industry (Supervision) Act 1993 . [Schedule 2, Part 1, item 1, section 4]

3.6                   To enable the CSC Board to comply with the new governance arrangements set out in the Bill, the Schedule requires that any appointment of a director nominated by the Minister for Finance (Finance Minister) that takes effect on or after 1 July 2016 must be independent from CSC at the time the appointment is made. An independent director must meet the requirements set out in the new definition of independent contained in new section 87 of the Schedule 1 of the Bill. [Schedule 2, Part 1, item 2,  subsection 12(4) and 12(4A)]

3.7                   After 1 July 2016 persons selected by the Finance Minister for a relevant acting appointment that commences on or after 1 July 2016 must also be independent. [Schedule 2, Part 1, item 6, subsection 18(2A)]

3.8                   An appointment of an independent director continues to be valid if that director ceases to be independent from CSC. The director would not, however, continue to count towards the new requirement contained in the Bill for trustee boards to consist of at least one-third independent directors. [Schedule 2, Part 1, item 3, subsection 12(7)]

3.9                   Section 17 has been expanded to provide the Minister for Finance the power to terminate the appointment of a director on the grounds that they have ceased to be independent from CSC. [Schedule 2, Part 1, items 4 and 5, subsections 17(5A) and 17(6)]

Number of directors

3.10               The size of the CSC Board will be reduced from eleven to nine directors (which includes the Chair) from 1 July 2016, through the reduction of one position of a Finance Minister-nominated director and one position of a director that is nominated by the President of the Australian Council of Trade Unions (ACTU). [Schedule 2, Part 2, items 7 and 8, subsections 11(1) and 11(2)]

3.11               The nine member Board will then comprise of:

•        two (currently two) non-independent directors nominated by the Chief of the Defence Force;

•        two (currently three) non-independent directors nominated by the President of the ACTU [Schedule 2, Part 2, item 9, paragraph 11(2)(a)] ;

•        four (currently five) independent directors selected by the Finance Minister in consultation with the Minister for Defence [Schedule 2, Part 2, item 10 and note to subsection 11(2)] ; and

•        an independent Chair selected by the Finance Minister in consultation with the Minister for Defence and subject to the agreement of the CSC Board.

3.12               As a result of the reduced number of directors on the CSC Board, the voting and quorum requirements will be adjusted accordingly. Six directors will constitute a Board quorum. Also, decisions made by the CSC Board will need the agreement of six of the nine directors. [Schedule 2, Part 2, items 11 and 14, subsection 21(1) and section 23)] .

3.13                The quorum and voting requirements will continue to apply where a director cannot vote for reasons provided for in section 22 of the Governance Act. [Schedule 2, Part 2, item 12 and 13, subsections 21(2) and 21(3)]

3.14               Where a decision is made without a meeting, the Board is taken to have made a decision where six directors indicate their agreement to the proposed decision in accordance with the method determined by the Board under subsection 24(2). [Schedule 2, Part 2, item 15, paragraph 24(1)(a)]

Application provisions

3.15               Existing appointments (including the appointment of a person to act as a director) and the termination of existing appointments to the CSC Board that occur before Royal Assent are not affected by the amendments in this Schedule. [Schedule 2, Part 3, item 16 ]

3.16               To assist the CSC Board in transitioning to the revised structure, Schedule 2 requires that CSC Board appointments, including acting appointments, that take effect between Royal Assent and 1 July 2016 must cease at the earlier of: the end of the period specified in the instrument of appointment; or the end of 30 June 2016. This limitation does not apply to the appointment of CSC directors nominated by the Chief of the Defence Force, as the appointment process for these directors will remain unchanged by the restructure of the CSC Board. [Schedule 2, Part 3, item 17]

3.17               A person who is appointed to the CSC Board between Royal Assent and 1 July 2016 (and whose appointment is therefore be required to terminate by no later than the end of 30 June 2016) can be nominated for reappointment as a CSC director on or after 1 July 2016, subject to meeting any requirements set out in the Governance Act.

3.18               Although item 7, Part 2 of Schedule 2 will reduce the size of the Board to nine directors on 1 July 2016, it is possible for the number of directors to be ten or eleven after this date because the amendments made by Schedule 2 do not affect CSC Board appointments that take effect before Royal Assent. As a result, the application provisions for Schedule 2 set out the quorum and voting provisions for the CSC Board where the size of the Board consists of ten or eleven directors. [Schedule 2, Part 2, item 18]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Superannuation Legislation Amendment (Trustee Governance) Bill 2015

Schedule 2: Governance arrangements for the Board of the Commonwealth Superannuation Corporation

3.19               Schedule 2 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

3.20               This Schedule makes amendments to the Governance of Australian Government Superannuation Schemes Act 2011 to restructure the Commonwealth Superannuation Corporation Board (CSC Board) to comply with the new governance requirements and to reduce the Board’s size from eleven to nine directors.

Human rights implications

3.21               This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

3.22               This Schedule is compatible with human rights as it does not raise any human rights issues.



Schedule 1: Schedule 1: Governance arrangements for registrable superannuation entities

Bill reference

Paragraph number

Part 1, item 1

1.35

Part 1, item 1, paragraphs 86(1)(a) and (b)

1.38, 1.39

Part 1, item 1, paragraph 86(1)(c)

1.44

Part 1, item 1, subsection 86(2)

1.41

Part 1, item 1, paragraph 86(3)(a)

1.45

Part 1, item 1, paragraph 86(3)(b)

1.47

Part 1, item 1, paragraphs 87(1)(a) and (b)

1.54

Part 1, item 1, paragraph 87(1)(c)

1.57

Part 1, item 1, paragraph 87(1)(d)

1.59

Part 1, item 1, paragraph 87(1)(e)

1.58

Part 1, item 1, paragraph 87(1)(f)

1.63

Part 1, item 1, paragraph 87(1)(g)

1.65

Part 1, item 1, subsection 87(2)

1.56

Part 1, item 1, subsection 87(3)

1.66

Part 1, item 1, subsection 87(4)

1.68

Part 1, item 1, subsection 88(1)

1.70

Part 1, item 1, subsection 88(2)

1.75

Part 1, item 1, subsection 88(3)

1.76

Part 1, item 1, subsection 88(4)

1.77

Part 1, item 1, section 89(1)

1.78

Part 1, item 1, subsection 89(2)

1.79

Part 1, item 1, subsection 89(2) and paragraph 89(3)(b)

1.81

Part 1, item 1,  paragraph 89(3)(a), subsections 89(4) and (5)

1.80

Part 1, item 1, subsection 89(6)

1.82

Part 1, item 1, subsection 90(1)

1.84

Part 1, item 1, subsection 90(2)

1.85

Part 1, item 1, subsections 90(3) and (6)

1.87

Part 1, item 1, subsection 90(4)

1.89

Part 1, item 1, subsection 90(5)

1.88

Part 1, item 1, subsection 90(7)

1.90

Part 1, item 1, section 91

1.91

Part 1, item 1, subsections 92(1) and (2)

1.94

Part 1, item 1, subsection 92(3)

1.95

Part 1, item 1, subsections 92(4) and (5)

1.96

Part 1, item 1, section 93

1.102

Part 1, item 1, section 93A

1.103

Part 1, item 1, section 93B

1.106

Part 2, item 2

1.109

Part 2, items 3 and 5

1.110

Part 2, item 4

1.111

Part 2, item 6

1.113

Part 2, item 6, subsection 10(1)

1.74

Part 2, item 7

1.114

Part 2, item 8

1.115

Part 2, items 9 and 10

1.116

Part 2, item 11

1.117

Part 2, item 12 and 13

1.118

Part 2, item 13

1.119

Part 2, item 14

1.120

Part 2, item 15

1.121

Part 2, item 16

1.122, 1.123

Part 2, item 17

1.125

Part 2, item 18

1.126

Part 2, item 19

1.127

Part 2, item 20

1.128

Part 2, item 21

1.129

Part 2, item 22

1.130

Part 3, item 23

1.136

Part 3, item 24, subsection 24(1)

1.132

Part 3, item 25

1.133

Schedule 2: Schedule 2: Governance arrangements for the Board of the Commonwealth Superannuation Corporation

Bill reference

Paragraph number

Part 1, item 1, section 4

3.5

Part 1, item 2, subsection 12(4) and 12(4A)

3.6

Part 1, item 3, subsection 12(7)

3.8

Part 1, items 4 and 5, subsections 17(5A) and 17(6)

3.9

Part 1, item 6, subsection 18(2A)

3.7

Part 2, items 7 and 8, subsections 11(1) and 11(2)

3.10

Part 2, item 9, paragraph 11(2)(a)

3.11

Part 2, item 10 and note to subsection 11(2)

3.11

Part 2, items 11 and 14, subsection 21(1) and section 23)

3.12

Part 2, item 12 and 13, subsections 21(2) and 21(3)

3.13

Part 2, item 15, paragraph 24(1)(a)

3.14

Part 2, item 18

3.18

Part 3, item 16

3.15

Part 3, item 17

3.16



 




[1]    APRA Quarterly Superannuation Performance March 2015.

[2]    The Financial System Inquiry, pages 2-84 July 2014.

[3]    Small funds include self-managed superannuation funds. APRA Quarterly Superannuation Performance March 2015.

[4]    The Australian Taxation Office also plays a role in the administration of self-managed superannuation funds.

[5]    Cooper Review, page 55.

[6]    In general terms, governance refers to the system of rules, practices and processes by which a company is directed and controlled.

[7]    Financial System Inquiry Final Report, Chapter Two; Governance of Superannuation Funds.

[8]    Australian Financial Review, Australia, Joanna Mather and Sally Patten, 25 August 2015.

[9]    At June 2013, 68 per cent (103 of 151) of registrable superannuation entity (RSE) licensees had an equal representation board structure.

[10] For example, the Industry Super Australia submission noted that out of a sample of 26 industry superannuation funds, 16 of the funds already have at least one independent director on their board. Of these, the majority of funds (11) had one independent director and the remaining five more than one independent director.

[11] Not-for-profit funds include industry, corporate and public sector funds. These funds are generally affiliated with either the public sector, individual corporations, trade unions or employer representatives and have an equal number of employer and employee representatives on a trustee board. Retail funds are generally run for profit and are affiliated with banks or other financial institutions. Retail funds have significantly more choice investment options than non-retail funds. In general terms, equal representation means that the board of a corporate trustee must consist of equal numbers of employer representatives and member representatives.

[12] Cooper Review, page 53.

[13] Cooper Review, page 43.

[14] Cooper Review, page 55.

[15] Financial System Inquiry, page 134 of the Final Report, November 2014.

[16] Best interests’ are defined by the sole purpose test in the Superannuation Industry (Supervision) Act 1993 , which focuses on maximising post-retirement benefits. The trustee’s ability to form a fund strategy that generates good long-term returns, while operating within reasonable risk bounds, is a critical element in serving members’ best interests. In general, a trustee is a person or company (corporate trustee) appointed under the terms of the trust deed to hold the trust property for the beneficiaries and to make sure that the plan is operated in accordance with the trust deed. Generally, trustees owe a fiduciary duty to the beneficiaries. Superannuation trustees must also comply with certain legislative duties.

[18] Toronto Stock Exchange: Corporate governance — A guide to good disclosure.

[19] Financial Reporting Council (September 2012): The UK Corporate Governance Code .

[20] Pensions Governance Survey 2013 (Mercer).

[21] A regulated superannuation fund is one which: elects to comply with the SIS legislation; has either a corporate trustee or pays retirement benefits as pensions; is a superannuation, pension, provident or benefit fund that is indefinitely continuing.

[22] RSE licensee is the holder of an RSE licence. An RSE licence is the licence granted by APRA to trustees of APRA regulated superannuation entities and with which the holder can act as the trustee of an RSE. Trustees of self-managed superannuation funds (SMSFs) and public sector superannuation schemes are not required to hold an RSE licence. There are two classes of RSE trustee licences: Public offer entity licence; and non-public offer licence. To hold a public offer entity licence the trustee must be a body corporate that is a constitutional corporation.

[23] A trust deed is a document, which sets out the rules for the establishment and operation of a fund. A superannuation trust deed includes provisions covering such issues as: who can be appointed and the processes involved in appointing trustees; who will be admitted as members of the fund; the process for receiving and investing contributions; discretionary powers of trustees; and the payment of benefits to members.

[24] Trustees of small APRA funds are usually professional trustee companies.