Government announces super fund governance reforms

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The Government has announced potential changes to the governance of large superannuation funds.

Assistant Treasurer Josh Frydenberg today released an exposure draft of legislation to require APRA-regulated superannuation funds to have at least one-third independent directors/trustees and an independent chair.

This is less than was called for by the Financial System Inquiry (FSI), to which the Government has yet to fully respond, which recommended a majority of independent directors and an independent chair.

“While the Government has carefully considered this FSI recommendation, we consider that the proposal for one-third independent directors and an independent chair, will substantially strengthen governance arrangements for the benefit of fund members,” said Mr Frydenberg.

The Government’s reforms are more in line with those proposed by the Cooper Review (Super System Review), which recommended one-third independent trustee/directors.

“Given the size of the superannuation system, and its importance in funding the retirement of Australians, good governance is absolutely critical,” said Mr Frydenberg.

“With this in mind, the Government is committed to ensuring strong governance standards apply to superannuation trustee boards. Independent directors bring additional experience and expertise to boards making a valuable contribution to their decision making.”

Treasury says the “definition of ‘independent’ is to include persons who do not have a substantial holding in the trustee or do not have (or have not had within the last three years) a material relationship with the trustee, including through their employer.”

If legislated, as currently drafted, the changes would apply from 1 July 2016, with a transition period for existing superannuation funds.

The changes would also mean APRA-regulated super funds would have to report if they have a majority of independent directors on an ‘if not, why not’ basis in their annual report.

Breaching the independent requirements would not be an offence, though it could result in APRA directing a superannuation fund to not accept contributions from an employer-sponsor. Additionally APRA would have the power to direct a super fund to comply with the independence requirements, with a penalty applying for non-compliance.

The changes will not apply to SMSFs.

Industry split on super fund governance changes

Unsurprisingly the proposed governance changes have split industry bodies. The Financial Services Council (FSC), which represents a number of large financial-industry companies, welcomed the announced reforms.

“The FSC has led the push for trustee independence since 2013 by requiring its members to have a majority of independent directors and an independent chair,” said FSC CEO Sally Loane

“We urge the parliament to pass these reforms to strengthen consumer protections in the superannuation industry and which aim to prevent any conflicts of interests.”

However the proposed changes have been rejected by organisations representing large superannuation funds. Industry Super Australia said the “costly obligations” would “impose one size fits all governance arrangements on the best performing sector.”

“Tackling the governance problems in other parts of the finance sector should be the priority,” said Industry Super Australia Deputy Chief Executive Robbie Campo.

The Australian Institute of Superannuation Trustees said the changes “are not supported by any hard evidence.”

“There is absolutely no evidence to suggest our governance model is broken or that forcing boards to include a mandated third of independent directors will benefit the members of our funds,” said AIST CEO Tom Garcia.

“The not-for-profit sector is not opposed to independent directors but we don’t support the mandating of independence, particularly as it runs counter to international trends in best-practice governance.”

Meanwhile the Association of Superannuation Funds of Australia (ASFA) says the changes are a “positive outcome for superannuation,” which “reflects changing community expectations as a result of the increasing size and complexity of funds.”

ASFA has already been supporting an increased number of independent directors on superannuation fund boards. ASFA CEO Pauline Vamos said “running superannuation funds today is very different to 20 years ago given their increased size and complexity around investments, retirement products, financial advice, digital disruption and member expectations.”

“Trustee board structures should provide the ability to manage the rapidly changing superannuation environment.”

The SMSF Association also supports the draft legislation with CEO Andrea Slattery saying “it’s critical to improve the governance of all superannuation funds, and having independent directors and chair is a positive step in this direction.”

The release of the exposure draft comes the day after the final sitting of Parliament before the winter break. Parliament is next scheduled to sit in August.

Submissions in response to the exposure draft are open until 23 July 2015.

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