By Judith Sloan
Contributing Economics Editor Melbourne
The Australian 6 Dec 2014
HOW many times have you heard the claim that Australia’s system of compulsory superannuation is the envy of the world?
When you hear this assertion next time, take note of who is doing the talking. Invariably it will be someone who works for a superannuation fund or for an organisation that makes its living from superannuation. Or Paul Keating.
In fact, there are some serious criticisms that should be levelled at our “world best practice” superannuation industry, including excessive fees, poor governance and dubious practices. While members of superannuation funds are dudded, a coterie of organisations and individuals are able to run off with the booty, often derived from longstanding political connections hidden from members.
When it comes to the vast superannuation industry (assets approaching $2 trillion), there are essentially five types of funds: industry, retail, corporate, public sector and self-managed. SMSFs are the largest sector in terms of number of funds and total assets. Retail and industry super funds have been losing out from the growth of SMSFs.
A story that has gone under the radar for many years is the suspect and unsavoury arrangements that operate within the industry super funds, where non-disclosure and secrecy have been key characteristics. Jobs have been given to people lacking suitable qualifications, lucrative contracts have been awarded to related parties without any competitive tendering and fortunes have been made by extracting excessive fees from members.
As a result of the Royal Commission into Trade Union Governance and Corruption, we have now learned of examples of industry super funds providing funds to employ union superannuation officers and leaking confidential information about members to unions.
The Murray inquiry into the financial system has also been taking a look at the superannuation industry, concluding that the level of fees and governance arrangements are problematic.
And these two inquiries follow the tactfully worded Cooper review on superannuation commissioned by the Labor government and released in 2010, which called for some significant changes to the governance arrangements of industry super funds.
A few own goals kicked by the industry super funds have raised more doubts. These include the decision by the largest fund, AustralianSuper, and other industry super funds to invest members’ funds in a new loss-making, online media venture, The New Daily; the investment by five industry super funds in the botched IT project undertaken by Superpartners costing more than $250 million; and the ham-fisted PR campaign waged by the industry super funds against SMSFs.
It is worth briefly recounting the history of superannuation. When the Labor government decided to introduce the system of compulsory superannuation in the early 1990s, the motivations of the key players were quite distinct. At the time, less than half the workforce was covered by any form of superannuation. Public servants, academics and high-paid company executives enjoyed generous superannuation arrangements, but other workers generally received nothing or very little.
Keating was genuinely concerned that the age pension would provide only a meagre existence for many retired workers and their families in the future. He was therefore attracted to the idea of effectively forcing workers to squirrel away some of their current pay to provide the basis for a more comfortable retirement.
Bill Kelty, who was then secretary of the ACTU, saw the establishment of the system of compulsory superannuation in any entirely different light. Happy to seem reasonable by trading off a pay rise for the initial introduction of the superannuation guarantee charge, the main game for Kelty was to establish an alternative business model for the union movement.
With union membership falling like a stone (Kelty’s strategy of forced amalgamation of the large number of unions that existed until the 1980s had failed to pay any real dividends in terms of increasing member numbers), Kelty saw an opportunity for industry super funds to boost the position of unions, as well as provide the means of directing investments towards union-preferred industries and projects.
The unions’ model for the investment of compulsory superannuation contributions was the industry super fund based on the equal representation model, with an equal number of trustees coming from unions and employers (read: employer associations).
The establishment of industry super funds essentially mirrored the pattern of union coverage. There was a super industry fund for retail workers and the Shoppies (the Shop, Distributive and Allied Employees Association); a super fund for construction workers and the Construction Forestry Mining and Energy Union; a super fund for healthcare workers and the Health Services Union; and so it went.
Amazingly, there was very little debate at the time about the structural features of these industry super funds. The equal representation model was simply accepted as the norm. But what is the rationale for employers having guaranteed positions on a trustee board? This makes no sense apart from giving cover to the unions and often providing some real skills to the boards, which ill-educated and ill-equipped union officials cannot pretend to offer.
And why would these industry super funds be configured to reflect the industry pattern of union representation? Are the retirement needs of retail workers really any different from the retirement needs of healthcare workers?
The reality is that the legislation drawn up by the Labor government of the day was designed to suit the union movement by maximising the scope for union officials to secure outside paid gigs and potentially to direct investments in ways that might directly benefit the members of the union. There was no choice in the system: award coverage determined the industry superannuation fund that workers would join and to which the employer contributions would be directed.
As events panned out, the industry super funds generally behaved more like conventional investment companies than outfits with various union-influenced agendas. To be sure, under the legislation, trustees must meet the sole purpose test of providing benefits to its members and this may have constrained the activity of the funds. With the possible exception of Cbus, which has a huge direct property portfolio, the asset allocation of most industry super funds is generally unremarkable.
Some of the wise heads in the union movement realised early in the piece that were an industry super fund to generate very poor investment returns or, more catastrophically, fail, then the Kelty strategy could fall apart. Oftentimes, experienced professionals were co-opted on to investment committees (raising the issue of what the trustees were doing), which provided the funds with the best advice possible.
Certainly, the governance standards were extremely slack. Some individuals, such as Bernie Fraser, former Reserve Bank governor and Treasury secretary, carved out significant careers by sitting on the boards of several super funds, as well as the boards of the service providers to the funds. Amazingly, this arrangement — would anyone be able to sit simultaneously on the boards of ANZ and National Australia Bank? — still persists.
According to figures provided by the Australian Prudential Regulation Authority, 7 per cent of trustees of industry super funds held more than one directorship last year, a slight reduction from the figure of 8 per cent in 2006. And more than half of these directors held positions on non-affiliated boards. More than 20 trustees held multiple directorships on three or more boards. This behaviour would never be countenanced in the listed company space.
And the failures of governance don’t stop there. Some of the industry super fund boards are extremely large — up to 18 members. There are also some trustees who have sat on the same industry super fund board for decades. And when it comes to finding out how much trustees are paid, there has been almost deathly silence, with the funds dragged kicking and screaming to disclose the fees of trustees and managers by the force of law.
The fact that APRA, the body responsible for regulating the industry super funds, could conclude that the governance practices of the funds are adequate speaks volumes about APRA itself. Asked recently about its intention to act on the issue of the leaking of confidential material by a fund, the head of APRA declared that he was leaving this to other bodies to sort out.
While the industry super funds initially enjoyed complete protection from members being able to choose a preferred fund or move funds, in 2004 the Howard government decided to legislate to provide for a degree of choice of funds for members.
But there are two problems with this legislation. First, an enterprise agreement can override the choice of funds provisions. And, second, award-covered employees who do not nominate a fund are directed to a small number of default funds that are all industry super funds. As a result of these restrictions, the industry super funds continue to enjoy a degree of protection that, under other circumstances, would be competed away.
While there have been some attempts to broaden the listing of default funds in modern awards, this process now is gummed up in the Fair Work Commission after the president was ruled to be ineligible to sit on the review panel. The fact there has been no progress on this front doubtless suits the industry super funds.
Probably the murkiest space in the operation of the industry super funds is the network of service providers: asset allocation advice, investment advice, funds management, administration services, banking services and the like. This is where the big money is, and where the links with the unions and the Labor Party are deepest.
Trying to get to the bottom of these connections is like swimming though treacle. But as one commentator put it: “If you track the linkages it becomes easy to believe that the industry super funds have spawned their own version of a vertically integrated financial services institution covering funds management, banking, financial planning and lobbying.”
Take Industry Funds Management, a company owned by 30 industry super funds and chaired by Garry Weaven, the person who probably has profited most from his connections to industry super funds.
According to the blurb from the company, “Garry is chair of IFM Investors, a global fund manager owned by a large group of Australian superannuation (pension) funds, and of Pacific Hydro, a leading Australian renewable energy company with extensive operations in Australia and South America. He also chairs The New Daily, a digital online news service available free to the public. Garry is also a director of ME Bank. Garry’s involvement in superannuation and funds management follows a successful career in the Australian union movement, which culminated in him being elected assistant secretary of the ACTU in 1986.”
Without a skerrick of modesty, the company’s blurb also explains: “IFM Investors is a uniquely structured global fund manager. We take a far-sighted view of the future and can invest unencumbered by shareholder conflict of interest because our ownership model is unlike any other financial institution.” Quite.
Also on the IFM board is former ACTU official Linda Rubinstein, who has sat on the boards of industry super funds Hostplus and Cbus, as well as chairing the Australian Government Employees Superannuation Trust.
Another board member is Greg Combet, former Labor minister and ACTU official. Apart from his gig with IFM, Combet is also principal adviser to Industry Super Australia (the peak body for industry super funds) and a board member of ME Bank (again).
There is also an important back story to Pacific Hydro, a company that Weaven bought — some people would say at four times the appropriate price — then proceeded to parcel out to industry super funds. In October, IFM was forced to take a $685m writedown on the business as the renewable energy industry floundered in Australia amid ongoing policy uncertainty and an oversupply in the electricity market.
And then there is ME Bank, on whose board Weaven, Fraser and Combet sit. Note that ME Bank is partly owned by various industry super funds and many of them use ME Bank exclusively for their banking services.
The bottom line is this: the industry super funds have been a great boon to the union movement and the Labor Party alike.
They provide well-paid jobs for former union officials, paid trustee gigs for current union officials and lucrative business opportunities for entrepreneurial insiders. They are the source, both direct and indirect, of substantial donations to the Labor Party.
And when their investments are overweight in a particular sector, the industry funds will not hold back from influencing government policy.
Even though funds clearly flout normal governance practices (boards that are too large, unqualified trustees, overlapping directorships), APRA is an ineffective regulator. The fact some of them are sub-scale seems not to concern it too much. The questionable links with and failure to disclose related parties are overlooked and, similarly, the possibility that some of the funds flout the sole purpose test is ignored.
The industry super funds are grimly holding on to the protection they are afforded through their monopoly position in many enterprise agreements and their listing as default funds in modern awards.
Without this shield, it is not clear how many members the industry super funds would have. Along with the retail funds, they have been losing members, who are flocking to the lower cost and greater control of self-managed superannuation.
When it comes to government policy, it is absolutely imperative that the legislation be enacted to ensure a majority of trustees are independent. The equal representation model has had its day and it’s time to move on.
It also may be necessary to legislate to unpick the insidious and uncontested relationships between the industry super funds and various service providers, some of which are owned in part or in full by the funds themselves. In some instances, these relationships are stipulated in the funds’ constitutions.
The government also has to break the logjam in respect of the default funds in modern awards and to remove the monopoly status of industry super funds in enterprise agreements.
By international standards, Australian superannuation funds offer a high-cost product that shaves up to 15 per cent off payouts relative to internationally comparable fees. What we need is a vibrant, competitive super industry in which all the players have a chance to secure and retain members based on low fees and superior returns. Just saying our superannuation system is one of the best in the world doesn’t cut it.
Original article here