Superannuation governance is under scrutiny

Governance in the superannuation sector is under scrutiny following Productivity Commission and recent banking Royal Commission revelations.

The fifth round of hearings in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry held in Melbourne 6–17 August heard from RSE (registrable superannuation entities) licensees relating to the sale of underperforming products, fees for no advice, withheld information from regulators, trustee qualifications and perceived conflicts of interest. The Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC) were also questioned on the lack of clarity over their powers and effectiveness as industry regulators.

In his opening address, Counsel Assisting Michael Hodge QC outlined the conflict over APRA and ASIC’s roles and their oversight of the $2.6 trillion superannuation sector.

“On any view, there is not presently a dedicated conduct regulator for superannuation trustees in Australia. APRA is, and views itself as, a prudential regulator that adopts a different approach to other regulators. ASIC considers that its jurisdiction in relation to superannuation trustees is limited. So if consumers are unable to do anything more than peer dimly through the darkness of their superannuation trustees and there is no regulator shining a spotlight on the trustees and searching out bad behaviour, that leaves us with the third possible safeguard of Australians’ retirement savings — reliance on compliance by the trustees themselves.”

The Royal Commission also questioned Nicole Smith GAICD, former chair of NAB’s super trustee company NULIS, regarding the perceived conflict between the for-profit nature of the business and the interests of fund members. Reviews by APRA and the Productivity Commission also cited a lack of evidence of rigorous board assessment and evaluation, and recommended improvements in governance.

In July, the AICD responded to a number of significant structural issues and proposed reforms raised in the Productivity Commission’s draft report, Superannuation: Assessing Competitiveness and Efficiency.

The AICD supports a more prescriptive approach to governance in the sector, noting the unique nature of superannuation and concerns that have been raised in reports, including from APRA and the Productivity Commission. The AICD agrees that greater transparency of merger decisions and consolidation across the sector is needed, with the aim of reducing the number of underperforming funds and improving member outcomes. The AICD also supports removing restrictions on independent director appointments to allow entities to appoint directors with the necessary skills and experience to bring value to the board.

Jim Minto GAICD, chair of Partners Life (NZ), director of the National Disability Insurance Agency, Equity Trustees, Dai-ichi Life Asia Pacific, and former chair/interim CEO of the Association of Superannuation Funds of Australia, says a strong focus on board composition, appointments and renewal processes underpins effective and well-governed boards. “The right balance of skills, experience, capability of directors and standard governance practices is very important, and these principles should apply equally to superannuation as they do elsewhere.”

Minto says lack of transparency is a major theme arising from the Royal Commission. “There’s no doubt super is complex, but it exists purely for Australians. It is their money, so the system must be safe, transparent, and trustworthy. We need to put customers at the centre of all decision-making and communicate in ways they can understand.”

He adds that the widespread “fee for no service” signals a much broader cultural issue. “This behaviour must change. Organisations must encourage people to speak out when they witness misconduct — and senior management and directors must act on it immediately. As the Royal Commission comes to an end, the sector must improve its transparency, increase efficiency, and start to simplify the system so Australians and their retirement savings are protected.”

See more Royal Commission-related coverage here.