Views on the bills
The proposals in the Treasury Laws Amendment (Improving Accountability
and Member Outcomes in Superannuation Measures No. 1) Bill 2017 (Measures No. 1
bill) and the Superannuation Laws Amendment (Strengthening Trustee Arrangements)
Bill 2017 (STA bill) seek to 'modernise and increase confidence within the
superannuation system'; and 'strengthen superannuation trustee arrangements'.
Submitters to the inquiry agreed with the overall objectives of the
proposed legislation to improve member outcomes, accountability and transparency
in the Australian superannuation system. However, support for the objectives of
the bills notwithstanding, concern was noted regarding various provisions of
the bills and whether they were the best way to ensure Australia's
superannuation system has a strong foundation today and into the future.
Both regulators with oversight of the superannuation industry, the
Australian Prudential Regulatory Authority (APRA) and the Australian Securities
and Investments Commission (ASIC), were strongly supportive of the measures as
they related to each regulator's remit and their ability to improve outcomes
for superannuation members.
This chapter examines the evidence received in relation to the proposed
reforms in the Measures No. 1 bill; before moving to the evidence received in
relation to the STA bill.
Treasury Laws Amendment (Improving Accountability and Member Outcomes in
Superannuation Measures No. 1) Bill 2017
Since January 2014, if an individual had not chosen a superannuation
fund, their employer had to pay their super to a superannuation fund that
offers MySuper; and existing default superannuation funds (those chosen by an
individual's employer) had until 1 July 2017 to transfer an individual's balance
into a MySuper account.
The aim of these MySuper changes were to provide:
...a simple, cost-effective, balanced product for the vast
majority of Australian workers who are invested in the default option of their
It has been previously acknowledged that members of a MySuper product
have effectively delegated the responsibility for making decisions regarding
their superannuation, including the way their money is invested, to the
The standards that a MySuper product must meet will be set
out in legislation and enforced by the Australian Prudential Regulation
Authority (APRA). Funds that do not operate as default funds, such as
self-managed superannuation funds (SMSFs) or choice products, will not have to
comply with these additional standards.
The Measures No. 1 bill seeks to further strengthen all default MySuper
products by replacing the current 'scale test' in the law with a broader
'outcomes test' to all registrable superannuation entities (RSE) licensees who
offer a MySuper product:
It will achieve this by introducing a requirement for
trustees to undertake a stronger, broader annual assessment of their MySuper
product outcomes to ensure they are promoting the financial interests of
MySuper members with almost 15 million accounts across the system.
APRA confirmed during a committee hearing that the broadened 'outcomes
test' would 'apply equally to all funds that offer MySuper products'. As at
June 2016, there were 115 MySuper products across the superannuation industry
including 46 MySuper products offered by retail funds; 43 MySuper products
offered by industry funds; 15 MySuper products offered by corporate funds; and
11 MySuper products offered by public sector funds.
The amendments would require each trustee of a regulated superannuation
fund to make an annual determination, in writing, as to whether the financial
interests of the members in the MySuper product are being promoted by the
trustee, having regard to a range of factors. This determination would follow a
The trustee makes an assessment of its MySuper product taking
into consideration a range of matters (for example, whether the options,
benefits and facilities offered under the MySuper product are appropriate to
those beneficiaries), including any matter prescribed in the regulations; and
The trustee compares their MySuper product against other MySuper
products using specified comparable metrics (for example, the fees and costs
that affect the return of the beneficiaries holding the MySuper product).
The determination, together with a summary of the assessment and
comparison on which the determination is based, are then to be made publically
available on the superannuation fund's website within 28 days of the
determination being made.
While some submitters were supportive of the amendments to replace the
'scale test' with the 'outcomes test', stakeholders queried whether the test
should apply to all superannuation products; what value it would add; and whether
it could be improved.
Applying the 'outcomes test' to all
Whilst supporting the need for the broadened 'outcomes test' for default
MySuper products, a number of submitters suggested a more fundamental change to
the existing law to apply the strengthened MySuper test to non-default, choice
In evidence before the committee, Industry Super Australia (ISA)
....there is a need to have an outcomes test for MySuper
products. There has been some concern that the existing arrangements around a
scale test for MySuper have been ineffective, and we tend to agree with that.
However, the Australian Institute of Superannuation Trustees (AIST)
expressed concerns that the proposed outcomes test does not apply to choice
superannuation products. AIST argued that as the objective of the 'outcomes
test' is to improve outcomes across the superannuation system, it should
therefore apply to choice products, particularly, due to the fact that choice
products have a greater degree of complexity.
ISA agreed with AIST, and proposed that:
The stated purpose of the proposed outcomes test, which would
replace the scale test, is to strengthen the obligation on superannuation
trustees to consider the appropriateness of their MySuper product offering.
This objective should equally apply to all superannuation products. Determining
that a superannuation product is appropriate should not be limited to MySuper
Treasury addressed this issue, noting that MySuper products often
involve additional obligations on a trustee compared with other types of
Mr Beckett explained that:
This was an explicit decision under the former government
that came out of the Cooper review. It reflected a view that default products
were often held by disengaged members and that they warranted a higher standard
of consumer protection. The basic framework is that we impose some design
restrictions and some fee restrictions on MySuper products in terms of the fact
that it's generally a single product and a single investment strategy and there
are requirements on fees.
Further, in his Second Reading Speech, the Assistant Minister to the
Prime Minister, Senator James McGrath explained that:
On 11 August this year, APRA wrote to all RSE licensees to
advise that it intends to consult on a proposal to apply an outcomes test to
all products, not just default MySuper products. As with the MySuper outcomes
test, this would include consideration of net investment returns, expenses and
costs, insurance, and other benefits and services provided to choice members.
The Government believes this is an efficient means through
which the choice sector can be strengthened for the benefit of members and
agrees with APRA’s proposal and expects it to be implemented.
APRA confirmed with the committee that it will implement an 'outcomes
test' for all superannuation products including non-default choice products,
through prudential standards to:
...ensure that the same outcomes assessment approach is applied
across the board, whether it's a MySuper product or a choice product or a
The value of the 'outcomes test'
APRA also confirmed during the committee hearing that that this approach
would mean that 'standards and outcomes for members will be lifted across the
entire APRA regulated industry'
as 'prudential Standards have the force of law in the same way as legislation
This was also supported by Treasury:
...the structure of legislation means it's very difficult. In
part the way these products operate, the diversity, the lack of consistent
reporting at this stage means it's not very difficult to do it in the law. But
what APRA is proposing to do is achieve a commensurate outcome simply by using
a different approach.
The Association of Superannuation Funds of Australia (ASFA) also suggested
that the 'outcomes test' would not be beneficial to members as it would
duplicate the information that is already available in the MySuper dashboard,
increasing the reporting burden that already exists.
ASFA also contended that members may find the assessments confusing or
potentially misleading as they are primarily designed to satisfy APRA and its
While supportive of improving the current 'scale test'; some submitters
expressed concerns that the proposed 'outcomes test' is not primarily focussed
on net returns. For example, Ms Volpato of AIST submitted that 'net returns
should be the primary factor in judging the selection of default funds',
and Mr Linden from ISA commented:
We are concerned that the outcomes test does not have a
primary focus on net returns. Ultimately, that's the money which people will
retire on and which, in the long term, will reduce taxpayers' exposure to the
age pension. So the MySuper outcomes test is there. We think it could be
With respect to the intent of the new 'outcomes test', the Assistant
Minister to the Prime Minister, Senator James McGrath clarified its purpose was
to deliver greater transparency and strengthen trustees' existing primary
obligation to promote the financial interests of MySuper members, including
through net returns by requiring trustees to:
...publicly release their determination of whether or not they
are promoting the financial interests of members and a summary of the
assessment and comparisons that lead to the determination... These changes will
ensure that trustees, who have a fiduciary obligation to regularly assess the
quality of their MySuper offering; the findings are transparent and address any
weaknesses that they identify.
To be clear, the 'outcomes test' will not weaken or lessen a
trustee's primary obligation to promote the financial interests of their
MySuper members, including through net returns – it will strengthen it. 
In evidence before the committee, Mr Beckett of the Treasury also
What drives relative performance is investment returns, which
reflects investment strategy, fees, tax and issues like that. That can be
driven by different things. I think funds can have different investment
strategies. In some ways, that can reflect different liquidity requirements and
different types of inflows—more stable inflows. Those are the types of things
that may cause funds to be able to undertake different types of investment
strategies and achieve different outcomes.
Enhancing APRA's capabilities
The Measures No. 1 bill amends the law to give APRA more discretion over
the authorisation and cancellation of authority to offer a MySuper product; and the power
to reject a change in the ownership of a corporate trustee. These changes were
welcomed by APRA
and broadly supported by submitters to the inquiry.
The Measures No. 1 bill also gives APRA the power to:
issue a direction to an RSE licensee, and take protective or
corrective action, where APRA has prudential concerns or if it is concerned
that a fund is not acting in the best interests of the members; and
make reporting standards that require the RSE licensee to report
expenses relating to investments of an RSE on a look through basis.
APRA was also strongly supportive of these reforms as they related to
its remit as a regulator, and their ability to improve outcomes for
superannuation members. However, some stakeholders cautioned that the expansion
in APRA's powers may weaken prudential regulation and increase the reporting
burden on superannuation funds. These issues are examined below.
The Measures No. 1 bill harmonises the directions powers across the
banking, insurance and superannuation industries, by enabling APRA to intervene
at an early stage to address prudential concerns in a manner that ensures
actions undertaken are in the best interests of members.
The amendments provide APRA the power to give a direction to:
an RSE licensee where it has concerns about one of the RSE
licensee's connected entities which raise prudential concerns and/or a
connected entity of the RSE licensee directly; and
an acting RSE licensee in circumstances in which that direction
can be made.
Under the proposed amendments an RSE licensee will commit an offence if
it contravenes a direction from APRA. The offence is a strict liability offence
subject to a penalty of 100 units (currently $21 000) which is consistent with
the current penalty for breach of a direction by an acting trustee.
AIST was broadly supportive of the proposed expansion of APRA's powers,
noting that APRA should be able to intervene if it considers that a particular
action might result in consumer harm. AIST also expressed concerns, however, with
the definition of a 'connected entity' in the bill. AIST stated that:
...the relevant definition of a 'connected entity' within the
bill and as utilised in the bill would not have application to related party
service providers which existed under a common corporate parent. That's
relevant because that's the most common structure that you'll see in the retail
for-profit sector, so those powers to intervene would appear to be not
effective in those circumstances, and we think that they should be.
However, Treasury and APRA both provided clarifications that addressed
the concerns expressed by the AIST in relation to the definition of a 'connected
entity' and the structures they believed to be common in the retail for-profit
Treasury explained that APRA would have strong directions powers in
relation to trustees in all sectors: retail, corporate, or industry; and
APRA's prudential powers apply to trustees and connected
entities, which are defined as subsidiaries. The reason they don't apply more
broadly in this case is due to a constitutional limitation. That's why it was
structured that way under the past Labor government and that's the reason it's
limited in that way. As a reality, APRA would direct a trustee to do something.
It can do that in any sector. In some ways, the connected entity would be a
very rare fallback position. It would direct the connected entity, if
necessary, to do something rather than direct a trustee to do something else. I
don't believe it would make material difference to the effectiveness of the
APRA confirmed that under their supervision, 'assuming that the related
party within a corporate group is under another APRA regulated entity, then to
the degree we have concerns we might have that avenue to address it if the
trustee didn't address it.' Mrs Helen Rowell of APRA also noted that:
...the primary focus is to get the trustee to address the issue
in the first place, and that is how we would expect to achieve outcomes on 99.9
per cent of occasions.
Some submitters also raised concerns about the threshold required to be
satisfied to issue a direction. For example, noting that proposed subsection
131D(1) permits APRA to give a direction to an RSE licensee if APRA 'has reason
to believe' that one of the criteria in paragraphs (a) through (j) is
satisfied, the Australian Institute of Company Directors (AICD) submitted that:
To ensure that this power has some appropriate checks and
balances in place, the AICD recommends amending s 131D(1) of the Bill so that
APRA is only empowered to act when it ‘reasonably believes’ one of the criteria
has been satisfied. This requirement contains both an objective element (was
the belief reasonable) and a subjective element (APRA did actually believe it).
The AICD also is concerned that a number of the criteria in paragraphs (a)
through (j) are diluted by phrasing such as the RSE Licensee being ‘likely to’
contravene, or that there ‘might be’ a material risk or material deterioration.
Dr Scott Donald, Deputy Director of the Centre for Law, Markets and
Regulation at UNSW Law, also provided evidence about the exclusion in the
proposed legislation of a requirement that APRA’s response to a situation be
directed towards or proportionate to the risks or potential costs of the
situation. He explained:
Relevance and proportionality are important qualities of any
regulatory scheme. Limiting the directions power to crisis situations would
partly address this concern, but such circumscription would reduce the capacity
of APRA to employ a proportionate response to less severe situations, and so
some express requirement that the direction be crafted and calibrated to
address the specific risk or harm would be preferable.
ASFA also raised concerns that the proposed directions powers to be
given to APRA are too broad.
Indeed, in its submission to the inquiry ISA considered the expansion of APRA's
powers, noting that:
The breadth of the expansion, the sensitivity of the powers
to discretion, and the fact that some of the powers are not prudential in
nature mean that the powers could achieve both good outcomes as well as bad
ones, with little public safeguards to ensure the former. As a result, the
proposals are not without risks.
The committee sought evidence from APRA regarding these concerns and
they explained that the new directions power is similar to the directions power
that they currently have for other APRA-regulated industries. APRA's Deputy
Chairman, Mrs Helen Rowell, described the new powers as a 'reserve power' which
would be used rarely, and that 'in practice, provides sufficient impetus for
issues that [APRA] raise[s] to get addressed without us having to actually
resort to using the directions power'.
The Measures No. 1 bill amends the Financial Sector (Collection of
Data) Act 2001 (FSCODA) to provide APRA with the ability to obtain
information on expenses incurred by the RSE and RSE licensees in managing or
operating the RSE.
Specifically, it gives APRA the power to make reporting standards that require
the RSE licensee to report expenses relating to investments of an RSE on a look
These measures are aimed to ensure greater transparency, in that members
and APRA alike will be able to more easily access information relating to how
superannuation funds are spending members' money.
APRA noted that the proposal to permit them to collect additional data
about expenditure on a look-through basis will address deficiencies and
inconsistencies in the information that is currently reported to APRA; and that
it will also provide additional transparency on the ultimate purpose and
destination of payments than is currently available.
Stakeholders also brought to the committee's attention reporting
requirements with which superannuation funds currently need to comply (such as,
ASIC’s Regulatory Guide 97: Fee and cost disclosure (RG 97)), and
questioned the usefulness of the additional requirements. For example, ASFA
commented that this measure had the potential to increase the reporting burden
on superannuation funds and noted that funds are currently adjusting for the
introduction of the RG 97 regime as well as producing the annual statistical
returns and quarterly returns, which is information placed in the public
domain. Dr Martin Fahy explained that:
Our concern is not about transparency and disclosures per se.
That's how the market for ideas works. What we are concerned about is the level
of granularity and its usefulness. Is a particular level of granularity useful
to a fund member? We have concerns that it wouldn't be, because they are
The Measures No. 1 bill amends the SIS Act to impose civil and criminal
penalties on directors of RSE licensees who fail to execute their
responsibilities to act in the best interests of members, or who use their
position to further their own interests to the detriment of members.
As noted in Chapter One, these measures are proposed in response to concerns
raised in the Financial System Inquiry (FSI), which the government accepted in
Currently trustees do not face civil or criminal penalties for breaching
their duties, and this bill aims to:
...strengthen the accountability of trustee directors by making
them subject to civil and criminal penalties for breaches of their fiduciary
The proposed measures provide for a maximum penalty of five years jail
for serious misconduct; and a maximum of $420 000 in civil penalties per
These measures were broadly supported by submitters to the inquiry who
commented that, in principle, this reform is a positive step that seeks to
discourage poor practices.
Mr Beckett, Principal Adviser, Retirement Income Policy Division of the Department
of the Treasury explained that the measures have been drafted to impose similar
criminal and civil penalties on directors of managed investment schemes who have
a fiduciary duty to members, as is provided for under the Corporations Act
2001. Mr Beckett also drew the committee's attention to the fact
that the criminal and civil penalties proposed in the Measure No. 1 bill stem
directly from Recommendation 13 of the FSI report.
ISA, Mercer and the Law Council of Australia also commented that this
schedule would expose superannuation trustee directors to greater risk of personal
liability than other directors in Australia.
The AICD supported the objective of the director penalties measures
proposed in the Measures No. 1 bill; however, noted its concern that the
measure 'goes beyond equivalence' because:
there is already a mechanism in the SIS Act to hold RSE Licensee
directors directly accountable to members with the leave of the court by virtue
of the covenants imposed by section 52A of the SIS Act In addition, APRA can
cause civil proceedings to be commenced in the name of a person if, after
investigation, the proceedings appear to APRA to be in the public interest
(section 298 of the SIS Act). The Bill anticipates that the SIS Act will
contain two parallel systems for holding RSE Licensee directors accountable but
does not address the consequences of that co-existence, most notably for a
member-initiated suit which follows an APRA prosecution.
The considerable information advantage that APRA will have as a
result of the directions power would enable the regulator to acquire and use
information that would not ordinarily be available under discovery in a
litigation context, or to ASIC under its existing investigatory powers. These
powers have been carefully calibrated over time to ensure they are balanced and
fair, and accord with principles of justice and the rule of law. The analogous
regime administered by ASIC with respect to responsible entities contains a
carefully calibrated set of checks and balances to ensure that it cannot abuse
its position as regulator in prosecutions. The requirement that the government
be a model litigator is another manifestation of this concern that the coercive
powers of the state not be abused.
ASFA also questioned whether the proposed penalties for directors would
have adequate protections, and suggested that there ought to be statutory
defences available which reflect the common law defences.
Portfolio holdings disclosure
The Measures No. 1 bill amends the Corporations Act to refine the
requirements for RSE licensees to make their portfolio holdings publically
The purpose of these amendments is to ensure that superannuation fund
members, and others including financial analysts, have access to publicly
available information about the portfolio holdings of superannuation funds,
while minimising the compliance burden on RSE licensees. Under the proposed
provisions, superannuation funds will be required to disclose on a semi-annual
investments (down to the underlying asset) that they hold
directly or through associated entities; and
their initial investments into non-associated entities.
The aim of these
measures is to ensure Australia's superannuation system remains consistent with
international best practice.
Amendments are made to the existing public holdings disclosure
obligations in the Corporations Act. Two important changes to the obligations
are the removal of:
the obligation to include information about financial products,
or other property that non-associated entities have directly invested in; and
the reporting obligations on parties to contracts and
arrangements that acquire a financial product using the assets, or assets
derived from assets, of an RSE.
Mr Beckett from the Treasury explained that generally, RSE licensees in the
retail, corporate, industry or government sectors will be required to disclose
underlying financial assets on an option by option basis. He specified that
this would apply to direct holdings and holdings through related entities,
however, it would not apply to non-associated entities. Mr Beckett explained
that the proposed portfolio measures were:
...making the arrangement more manageable for superannuation
funds by saying you go down to the financial product level for each option in
terms of direct and associated holdings but you stop at the first non-associated
entity level in respect of non-associated entities. That's the level at which
you disclose, and there will be regulations saying exactly how that's done, and
it will happen twice a year.
While stakeholders supported the portfolio holdings disclosure measures,
and agreed that they would improve transparency and assist consumers to better
understand and compare super products in relation to direct holdings and
holdings through related entities;
the majority of submitters expressed concerns that the measures will not apply
to non-associated entities and thereby reduce the obligations of such entities.
ISA and the Australian Council of Trade Unions (ACTU) noted their
concerns that the portfolio holdings disclosure measures would amend current
requirements so that the disclosure requirement does not apply to choice
products that contain multiple investment options (an intrinsic feature of
The ACTU also noted that a superannuation fund which invested its assets in a pooled
superannuation trust (which was not a connected entity) would not be required
to disclose its portfolio holdings.
In addition to raising concerns about the reduced obligations for
non-associated entities, AIST suggested that there was a need for consistent
disclosure methodology reporting.
However, in evidence before the committee, Treasury confirmed that there
is no platform carve-out in the portfolio holdings disclosure provisions; and
that they apply equally to platforms and other structures.
ASFA also expressed concerns about the protection of confidential
information about commercially sensitive assets and the effect this may have on
disclosure and application for relief to ASIC (where asset values exceeds 5%).
They also raised concerns about the proposed 31 December 2018 commencement
date of the portfolio holdings measures, arguing that:
Given the time it will take to consult on the content of the
regulations, some of which is highly complex, the 2018 target will not give our
members enough time to make the necessary system changes. 
Annual members' meetings
The Measures No. 1 bill proposes to amend the SIS Act to require RSE
licensees to hold annual members' meetings (AMMs)
to discuss key aspects of the fund and provide members with a forum to ask
questions about all areas of the fund’s performance and operations.
To provide flexibility and minimise compliance costs, trustees will have
the option to hold AMMs electronically.
Submitters broadly supported the principle of the amendments to increase
member engagement. In particular, CHOICE said that they were pleased to see
'the attention on increasing member engagement with superannuation funds...through
annual members meetings'.
However, CHOICE also noted that an AMM may not be the most productive or
efficient way of achieving this outcome, noting that:
...in principle an AMM is a positive step towards better member
engagement, but greater thought could be given to how these meetings could
ISA indicated their support for AMMs, noting that the Review into the
Board Governance of Not-for-Profit Superannuation Funds conducted by Mr Bernie
Fraser recommended regular member meetings.
A number of submitters including ISA, Mercer, ASFA and AMP
also contended that introducing AMMs would involve significant costs and fund
resources. These submitters noted that they considered the costs involved to be
in excess of the estimated costings put forward in the explanatory materials to
ASFA also contended that there 'could be a better and more cost effective
mechanism to address concerns about member engagement'.
AIST also considered that superannuation funds should have the
flexibility to determine how they engage with their members.
AICD further stated that the AMM measures in the Measures No. 1 bill are too
Dr Scott Donald also cautioned that the proposed AMM measures may not achieve
their desired objective.
Some submitters also raised concerns about the way the legislation has
been drafted, noting that in its current form, it appears as though all defined
benefit plan actuaries would be required to attend AMMs. ANZ recommended that
the requirement be that only one actuary attend.
Mercer explained that:
On our reading, the draft legislation would require every
actuary to attend the AMM, which would clearly be impractical as well as
The committee believes that the broader 'outcomes test' will deliver
transparency and promote the interests of MySuper members. The committee
acknowledges concerns expressed by submitters that choice superannuation
products are not subject to the same test. However, the committee also notes that
there has always been a higher standard for MySuper products given it protects
default money. Despite this, the committee notes that APRA is currently
consulting on a proposal to apply an 'outcomes test' to all products, not just
default MySuper products. The committee is of the opinion that this is the most
efficient means through which the choice sector can be strengthened for the
benefit of members.
The committee is focussed on ensuring Australia's superannuation system
delivers outcomes for members first and foremost; and believes that Australia
needs a stronger regulatory framework to protect members' money and interests. The
committee notes that the measures proposed in the Measures No. 1 bill to
enhance APRA's capabilities, harmonise the directions powers across the
banking, insurance and superannuation industries. The committee is of the
opinion that strengthening APRA's direction powers will enable early stage
intervention to address prudential concerns in a manner that prevents against
consumer harm. The committee acknowledges submitters concerns about the breadth
of APRA's new powers, however, the committee notes that the new directions
powers are similar to the directions powers they have for other APRA-regulated
industries. Indeed, the committee is of the view that further circumscription
of the directions powers has the potential to reduce the capacity of APRA to
employ a proportionate response to less severe situations.
The committee recognises that a compulsory superannuation system needs
to be transparent and accountable for the way it spends members' money. The
committee considers that by enabling APRA to make reporting standards that
require funds to provide detailed expense information about their operations
and management will give consumers much needed transparency, and both consumers
and APRA alike, a better understanding of how funds are spending members'
money. The committee is cognisant that superannuation funds are currently
required to comply with other reporting requirements and notes stakeholder
concerns about the impact of the proposed additional reporting requirements.
However, in the committee's view the additional reporting requirements will
address deficiencies and inconsistences in the information that is currently
reported to APRA and provide additional transparency.
The committee welcomes stakeholders in principle support for the
measures which strengthen the accountability of trustee directors by making
them subject to civil and criminal penalties for breaching their fiduciary
duties. The committee also notes that the director penalties provisions of the Measures
No. 1 bill implement a recommendation of the Financial System Inquiry, which
the government accepted in 2017. The committee acknowledges concerns raised by
submitters about the exposure of directors and safeguards, however, notes that
the proposed measures would impose similar civil and criminal penalties as
those on directors of managed investment schemes who have a fiduciary duty to
members under the Corporations Act.
The committee believes that Australia's superannuation system is among
the best in the world; and that the proposed changes to portfolio holdings
disclosure will ensure that Australia's superannuation system remains
consistent with international best practice. The committee notes that while
stakeholders supported the portfolio holdings disclosure measures, and agreed
that they would improve transparency and assist consumers to better understand
and compare super products in relation to direct holdings and holdings through
related entities; concerns were raised about the fact that the measures will
not apply to non-associated entities and thereby reduce the obligations of such
entities. The committee notes evidence that there is no platform carve-out in
the portfolio holdings disclosure provisions; and that they apply equally to
platforms and other structures, and importantly, will apply to all RSE
licensees, in all sectors: retail, corporate, industry or government.
The committee believes that increased member engagement with their
superannuation fund is an important part of ensuring accountability in the
industry. The committee acknowledges that the new requirements to hold annual
members meetings will impose additional costs on superannuation funds. However,
the committee notes that the proposed changes allow superannuation funds to hold
annual member meetings electronically, providing flexibility and minimising
compliance costs. With respect to confusion among stakeholders surrounding the
current form of the legislation requiring actuaries to attend annual members
meetings, the committee encourages re-examination of the provisions to ensure
they will operate as intended.
Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill
The STA bill implements the intent of two major independent reviews of
Australia’s financial and superannuation systems: the 2010 Super System Review
(Cooper Review) and 2014 Financial System Inquiry (FSI). Both reviews
recommended the need for independent directors on all superannuation boards. Both
Chairmen of these reviews, Mr Jeremy Cooper and Mr David Murray AO, provided
evidence to the committee confirming their continued support for the need for
independent directors on all superannuation fund boards and support for the
measures in the STA bill to be implemented.
The reforms are designed to strengthen the governance arrangements
across the entire superannuation industry by facilitating more diversity and
skills and strengthening conflict management.
To achieve this, the STA Bill introduces a requirement for RSE licensees to
have at least one-third independent directors and for the Chair of the Board of
directors to be one of those independent directors as well as an independent
The evidence received in relation to these proposed measures is discussed
Support for a consistent definition
The STA bill introduces a definition of
'independent' and gives APRA the power to determine whether an
individual satisfies the legislated definition of independent.
Under this new definition, individuals who would not be considered
independent includes those who are substantial shareholders of the RSE
licensee, or who have had a material business relationship with the RSE
licensee within the last three years, or who have served as a director or
executive officer of the RSE licensee.
The majority of submitters to the inquiry supported the introduction of
a consistent definition of 'independent'.
For example, Mr David Murray AO believed, 'this is black and white. It
should be very clear what the expectations on independents are'.
The Financial Services Council also supported the introduction of a
consistent definition, noting that the SIS Act 'does not effectively deal with
a range of potential conflicts that arise in different types of superannuation
funds, including retail, industry, corporate and public funds'.
However, in considering the definition of 'independent' proposed in the
STA bill, some stakeholders suggested alternative constructions based on more
discretion for trustees to determine the meaning of 'independence'.
ASFA supported the proposed requirement for superannuation trustees to
have one-third independent directors but noted that under the proposed
...a large cohort of very qualified people who currently work
in the sector, work in financial services, would be excluded by the current
definition—and we think to the detriment of the overall system.
ASFA also suggested that the definition of 'independent' that should
apply is the definition that currently exists within the wider corporate
governance requirement of the ASX, tailored to the reality of superannuation
funds. Dr Martin Fahy explained:
What that would do is not only give us consistency across the
wider corporate-governance environment but also ensure that people who are
currently defined as independents for that purpose would also be in a position
to bring their skills and experiences to bear on the superannuation sector.
As noted above, APRA will be given the role of determining whether a
director is independent. Professor Graeme Samuel AC, who conducted the review
of Cbus and its governance in 2015, agreed that APRA would be well qualified to
identify who is an independent director.
Mrs Helen Rowell, Deputy Chairman of APRA explained to the committee
that there would be a 'degree of judgement and flexibility around how those
provisions would be interpreted in practice'. She further noted that an
assessment of a director's independence would initially be made by the trustees
themselves and that they would then consult APRA:
They may consult with us on that but primarily the onus for
those sorts of decisions is, in the first instance, with the trustee. We would
expect them to look at the materiality of the particular relationship and
whether it precluded a view that they were independent or not.
If an RSE licensee determines that an individual does not
meet the definition as set out in the legislation, however, still deems that
the individual is sufficiently independent of the RSE licensee, the case can be
taken to APRA for determination.
The value of independence
As noted above, the STA bill implements
recommendations made by the FSI and the Cooper Review. It proposes to introduce new trustee arrangements to
require RSE licensees to have at least one-third independent directors and for
the Chair of the Board of directors to be one of these independent directors.
Mr David Murray AO, who led the FSI, commented that:
When a governing body sits to serve the interests of the
people it's meant to serve, it shouldn't be constrained by peripheral
interests. That's why, in my view, independence is very important—independence
from the executive and independence from peripheral interests.
Mr Jeremy Cooper, who led the Super System Review agreed that
independent directors on the boards of superannuation funds would provide
better governance in the industry.
I think there’s an abundance of evidence that independence is
a good thing.
Professor Graeme Samuel AC also pointed out the value of independent
directors, commenting that:
...independent directors can be very, very important, because
if they have got the right quality and the right skills and the courage of
their convictions—and I emphasise that, by the way—then they can have a
significant role to play in just ensuring that dispassionate, objective
positions are put on any particular issues where conflicts might arise.
FSC offered its support for the introduction of a legislative measure that
requires at least one-third of independent directors. FSC had itself introduced
a standard for its members that required them to appoint a majority of
independent directors and an independent Chair as recommended in the Cooper Review.
In evidence before the committee, Mr Briggs said:
The package would, for the first time, establish a legislated
minimum standard of governance that covers every single superannuation fund in
the industry. There would be no outliers. This point is critical: this debate
should not be viewed through the lens of one sector versus another.
Mr Briggs went on to comment that:
An efficient and well-run superannuation fund—whether it's an
industry fund, retail fund, corporate fund or government fund—has nothing to
fear from a high level of oversight in terms of not only prudential oversight
but the introduction of independent directors on their boards.
Similarly CHOICE supported the role of
independent board director members in strengthening governance in the super
sector. Mr Kirkland from CHOICE explained that:
Informing that view, we note that super is compulsory for all
employees, we all depend upon the quality and stability of the system, and we
think it's important that funds are held to high standards of governance.
AICD were also of the opinion that the introduction of the one-third
independent directors will strengthen governance within the superannuation
sector. Ms Louise Petchler from AICD explained that:
Independent directors bring a unique perspective as they are
not aligned or perceived to be aligned with management or sectional interests.
Good governance codes around the world recognise that independent directors
contribute positively to the decision-making of boards. Their objective view
can support effective evaluation of performance for both the board and
In contrast, Mr Bernie Fraser explained to the committee that in his
view, mandating a quota of independent directors was not the key to good
governance, but rather that good governance stemmed from individuals who have
the necessary skills and values to make decisions in the interest of the
superannuation fund members. While Mr Fraser viewed the question of
independence as peripheral, when compared with the desirable skills and values,
he did not consider that mandating independence had negative consequences.
AIST also raised concerns about the measures 'interfering' with
superannuation fund's owner's rights to run their fund by mandating how their
boards are structured. AIST advised the committee that this:
...is not something that the government does for listed
companies nor, indeed, any other APRA-regulated financial institution.
However it was noted that government does not mandate the purchase of
shares in listed companies or the purchase of products from other APRA
regulated financial institutions. Mr Cooper commented that legislating the
requirement for independent directors is necessary due to the fact that
superannuation is a compulsory system:
You cannot sell out of super. If you don't like it, that's
just too bad—you have to be in it. So the government has an onus in this regard
to make sure that there are uniform high standards.
Equal representation model vs
In introducing new minimum independence requirements for directors on
superannuation fund boards, the new law will replace the existing requirements
relating to equal representation of members and employers on the boards of
standard employer-sponsored superannuation funds.
A number of submitters to the inquiry contended that the removal of equal
representation and introduction of the proposed one-third set up could
potentially lead to worse outcomes for members of superannuation funds.
Some of these submitters considered that the changes proposed in the STA
Bill are unnecessary and unfairly target industry super funds. In particular, ISA
contended that industry super funds should not be required to change their
equal representation model given that their performance has been consistently
stronger than that of retail super funds which are more closely aligned to ASX
corporate governance principles. ISA noted that:
If implemented, the measures contained in the Bill will
impose additional costs on members and substantially undermine a key pillar of
the not-for-profit superannuation industry. At risk is the distinctive culture
and ethos of service to others that defines not-for-profit superannuation and
which has helped to deliver superior returns to members.
AIST also commented on the proposal to remove the requirement of equal
representation, noting that this model has been 'the cornerstone of member
representation and accountability in the superannuation industry for decades'.
Ms Eva Scheerlink, AIST's Chief Executive Officer argued that:
Representation of members and employers on super fund boards
ensures a balance in decision-making and a true understanding of the membership
The committee also heard evidence from the ACTU who explained:
We want to maintain an approach whereby the people who are on
the boards of the fund are allowed to determine what's the most effective model
for their industry. Having determined the most effective model, we want an
arrangement where they concentrate on working on the interests of the members
as the primary goal towards which they serve as trustees.
Mr Jeremy Cooper noted that those funds that are currently using equal
representation models, were complying with their own constitutions as opposed
to relying on any current legislation.
Mr Cooper further noted that the proposed legislation is sympathetic to the
equal representation model, pointing out that those funds that will be required
to introduce one-third independent directors will 'merely need to rearrange
themselves'. He explained:
To me, that does not disrupt the benefits of equal representation:
you still have member representatives and employer representatives sitting
there with an independent chair. I regard that as a 21st century model, but it
doesn't break the existing model.
Mr Cooper also highlighted that three industry super funds—Hosptplus,
Unisuper, and, Equip—had each already transitioned to a one-third independent
board with an independent chair.
He also drew the committee's attention to the Netherlands and Hong Kong as
countries with successful and strong performing superannuation industries with
a majority of independent directors.
Mrs Helen Rowell, Deputy Chairman of APRA informed the committee of
APRA's support for the proposed amendments to require a minimum of one-third
independent directors and an independent chair on superannuation boards,
While some in the industry contend that the existing
arrangements serve their members well, APRA sees little downside to an
additional injection of independence.
Mr Ian Beckett, Principal Adviser, Retirement Income Policy Division of
the Treasury, also explained that the purpose of the STA Bill is to impose a
minimum standard of independence across the entire superannuation industry. It
will apply equally to retail, corporate, industry, and government funds. He
further specified that:
[W]hat the government is trying to do as part of this package
is lift [governance] standards, especially on the management of conflicts and
related party transactions. I think that is an issue in the not-for-profit
sector and I also think it's an issue in the for-profit sector. Part of this
legislation is also about lifting standards in the retail sector. So I don't
see it as something that is specifically targeted at the not-for-profit sector.
The committee believes that ensuring directors on the boards of
superannuation funds are independent is critical to providing better governance
in the industry; and the committee notes that the majority of submitters to the
inquiry supported the introduction of a consistent definition of 'independent'.
The committee acknowledges that a number of submitters have called for
alternative, more flexible and discretionary definitions of 'independent' to be
used, noting that the proposed definition does not align with the wider
corporate governance requirement of the Australian Stock Exchange. However,
superannuation is different because it is a mandated system. The committee
considers that the certainty offered by an objective, legislated definition of
independence is appropriate and will ensure the objective of the STA bill is
achieved. This was the view of the regulator. The committee also considers that
APRA is well qualified to identify who is and who is not an independent
director according to the law.
The committee agrees with stakeholders that the introduction of a
requirement on RSE licensees to have one-third independent directors, and a
Chair of the Board of directors who is one of those independent directors, will
strengthen governance in the superannuation sector. While the committee
acknowledges that good governance also stems from ensuring directors have the
requisite skills and values to perform their duties, the committee considers
that establishing a legislative minimum standard of governance that covers the
independence of directors is a step in the right direction.
The committee acknowledges the concerns raised by some submitters that
the removal of the equal representation model, and the introduction of the
one-third set up, will unfairly target industry super funds. However, the
committee considers that the amendments proposed in the STA bill are
sympathetic to the equal representation model, and that it is reasonable to
require those funds who are currently using equal representation models to
rearrange themselves to introduce the one-third independent directors model.
The committee recommends that the Senate pass the bills.
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