Retail superannuation funds' directors are intrinsically conflicted because they serve two masters - shareholders and members - in contrast to not-for-profit (industry) super funds which are responsible to members only, the not-for-profit funds peak body has said.
Australian Institute of Superannuation Trustees (AIST) chief executive Fiona Reynolds said the debate on governance highlighted the confusion around the definitions for the term 'independence' (within the Superannuation Industry (Supervision) Act 1993 (SIS Act) and the Corporations Act), and how independence should be interpreted and applied to the very different governance and ownership structures within the super industry - retail versus not-for-profit funds.
"Retail superannuation funds' directors are intrinsically conflicted because they serve two masters - shareholders and members - in contrast to not-for-profit (industry) super funds which are responsible to make profits for members only," Reynolds said.
Financial Services Council chief executive John Brogden countered, stating many industry super fund boards "do not have a single independent director. Indeed many of the largest funds have no board independence whatsoever and have directors who are conflicted because of their employment with a union or employer group".
"The government's Cooper Review recognised this and recommended the end of 'equal representation' which is rife with conflicts.
"The review recommended that equal representation should no longer be allowed. This recognised the inherent conflicts which are unable to be managed. Its recommendation was that one-third of directors be independent. This was a good start but a majority of independent directors reflects contemporary best-practice."
Reynolds countered that "currently, directors of some 'for-profit' retail funds are mostly drawn either from the fund itself or from the executive of the bank or financial institution that owns the fund, and typically provides superannuation services back to that fund.
"As research from the APRA (Australian Prudential Regulation Authority) has shown, the inherent conflicts in this arrangement have the potential to erode members' returns.
"In contrast, all the directors of not-for-profit funds - whether appointed by a union, an employer body or appointed as a 'non-associated' director - are 'non-executive' and free of any material relationship with the fund.
"Sponsoring organisations - be they employer-bodies or unions - are not in the day-to-day business of providing superannuation services. We need to understand what sort of independence is being sought. As it stands now, we don't think this is clear."
Brogden said the council's superannuation governance policy would be mandatory for member companies from 1 July 2013 with 12 months to comply.
"These changes are overdue," he said." ##
"The Cooper Review of our compulsory superannuation system exposed an industry that had failed to keep pace on transparency and no longer met the governance standards it expected of the companies in which it invested.#
"The council's reforms go beyond what is required by law and by the new standards to be introduced in 2013 by APRA. We require Australia's retail and many corporate funds to meet the highest standards of transparency and governance in the way they operate."
Funds would have a majority of independent directors, an independent chair, a ban on conflicted directorships, and mandatory policies on proxy voting and environmental, social and governance matters.#
Brogden said some funds already has a majority of independent directors - for example, AMP and BT.
Others did not, nor did they have an independent chair, "so for them this policy represents a significant change for their board structures - a change they have accepted and will embrace," he said.#
"Superannuation funds have a clear legislative mandate to operate solely for the provision of retirement benefits for members. Independence strongly bolsters this test as it removes the potential for real or perceived conflicts. Our reforms also prohibit multiple directorships on competing super funds."
Reynolds said AIST had recommended to APRA and the federal government that it clarify the definition of independence in the SIS Act.
Amendments to the SIS Act needed to acknowledge and recognise that existing not-for-profit directors were "non-executive" and free of any commercial conflicts of interests whilst also representing sponsoring organisations.
AIST proposed that the term "independent" replace the term "non-associated" to describe directors who are appointed by the board rather than those nominated by sponsoring bodies.
"We believe this new terminology is particularly important to acknowledge that when not-for-profit super boards appoint directors outside the equal representation system, the reason is to enhance the whole-of-board's skill set and not to seek any independence of mind or independence of judgement," Reynolds said.
