Manager
Insurance and Superannuation Unit
Financial System and Services Division
The Treasury
Langton Crescent
PARKES ACT 2600 
Email: superannuationgovernance@treasury.gov.au 

Dear Sir/Madam 
Submission on Improving superannuation governance
I would like to comment briefly on the new proposals. I made a detailed submission to the November 2013 Treasury inquiry on this and related subjects, which I have attached for reference.

I support the proposed changes to require at least one third of directors/trustees of RSEs to be independent, and that the chair be independent. I understand that the requirement of  “at least one-third” will be mandatory; whereas the tougher standard of “majority independents” is intended to be voluntary, and a matter of reporting “if not, why not”, but with no sanction for failing to meet the majority level. 

This is a reasonable compromise, to protect members’ interests through imposing more modern standards of governance, but allowing some flexibility so that “majority independents” is not compulsory.

Although my own superannuation investments are in industry funds (as a member of the public, not though any union affiliations) I disagree with the ISA’s objection to the proposed legislation. ISA has stated that is perverse to “interfere with the governance model of the 'all profits to member' super funds that have driven two decades of strong returns for members, nearly 2% higher than 'for profit' funds, on average" and "The watchful eyes and questioning minds of industry super fund directors have not only delivered the best performing funds, they have avoided the widespread consumer losses and scandals which have engulfed the major banks and wealth managers over recent years.”

These statements may be generally true, but it does not follow that the superior average returns earned by industry funds are caused wholly or even partly by their governance practices. That connection is probably statistically close to neutral and irrelevant; the better returns are a result of their not for profit status, and their unconflicted objective to minimise costs for members, especially in paying for external investment management or platform and admin services.  My comments here should also apply at least in principle to corporate super funds. To be required to have a minimum of one-third independent directors or trustees is a small change, at miniscule extra cost, and should have no adverse effect on prospective returns. 

The second statement above by ISA is unfortunately not universally true. For example, MTAA Super suffered huge losses through and after the GFC as a result of its very high allocation to property and infrastructure; these losses are still severely affecting its longer term returns relative to its peers.

The proposed governance regulations will apply three years after Royal Assent for existing funds, but they have already been long-canvassed, so the funds will have had about four years’ warning of the likelihood or the reality of the changes occurring to make the necessary Board appointments / replacements.  I believe that, since the changes are not onerous, the transitional period is too long, and could fairly be shortened to July 2017.

It would be helpful for the regulations to provide a definition of “material relationship” to give guidance on the minimum restrictions that Government expects; these could be then overridden by tougher limits if APRA so decided.  At the least, I believe that the term should proscribe any form of relationship that would need to be disclosed in “related party” information in a listed entity’s annual report. 

Other matters

Although these proposed governance changes are welcome, and overdue, they had already been canvassed in the Better regulation and governance, enhanced transparency and improved competition in superannuation Discussion Paper 28 November 2013, which received 90 submissions when the consultation period closed nearly 18 months ago. It is a pity that the Government has not taken this opportunity to include regulatory improvements in respect of the other topics raised in that Discussion Paper.  Management of conflicts of interest (Focus Question 7), Maximum board tenure and Appraisal of directors’ performance (Focus Questions 8 and 9) are important topics that are closely related to the substance of the new proposals, and should have been included.

I can understand the exclusion of new regulation in respect of PART 3A. CHOICE PRODUCT DASHBOARD (Focus Questions 13-19), as these themes involved some complexity and are in flux through other inquiries or regulatory processes.   However, it’s unfortunate that proposals have not yet been made regarding PART 3B. PORTFOLIO HOLDINGS DISCLOSURE (Focus Questions 20 to 26).  At the least, the superannuation industry and its fund members would benefit from a response by Treasury to the 90 submissions, to indicate the Government’s current thinking on this matter (and the quality of RSE reporting standards more broadly).  The weak reporting regime that applies to RSEs (far inferior to that which applies to even the smallest listed companies and trusts) is a major flaw, and even more serious than the matter of independence of trustee governing boards. It is unacceptable for a $2 trillion sector.

Richard Wilkins
23 July 2015