Superannuation Legislation Trustee Governance Amendment: Needed Reform?

Wednesday 21 October 2015 @ 10.55 a.m. | Corporate & Regulatory | Legal Research | Taxation | Trade & Commerce

The Superannuation Legislation Amendment (Trustee Governance) Bill 2015 (Cth) (the Bill) was introduced into the House of Representatives on Wednesday 16 September 2015 by the Assistant Treasurer, Mr Josh Frydenberg and, as of 20 October 2015, has reached third reading stage, with the Bill yet to be debated in the Senate.

Essentially, the Bill proposes to amend the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) to introduce, in the words of the Assistant Treasurer:

". . . a higher standard of governance for superannuation funds, in line with domestic and international best practice."

Further, the Assistant Treasure states that the changes proposed by the Bill:

". . . fulfill the government's election commitment to align governance in superannuation more closely with the corporate governance principles applicable to ASX listed companies."

The Mechanics of what is proposed

The Bill proposes to amend the SIS Act so as to:

  • require trustees of registrable superannuation entity licensees (RSEs) to have a minimum of one-third independent directors and an independent chair on their boards; and
  • makes consequential amendments to the Governance of Australian Government Superannuation Schemes Act 2011 (Cth) to restructure the board of the Commonwealth Superannuation Corporation by reducing the number of directors from eleven to nine and providing for the majority of the directors to be independent.

Schedule 1 of the Bill 2015 will amend the SIS Act to introduce new governance arrangements requiring corporate trustees of RSEs to have at least one-third independent directors and for the chair to be one of these independent directors. The new governance arrangements replace the existing requirements in Part 9 of the SIS Act that require equal representation of employer representatives and member representatives on the boards of standard employer sponsored superannuation funds of five or more members.

The Bill also provides a revised definition of "independent" in the SIS Act. Under the definition, persons who would not be considered to be independent would include those who are substantial shareholders of the RSE licensee or who have or have had, within the last three years, a material business relationship with the RSE licensee. Further RSE licensees must comply with Australian Prudential Regulation Authority's (APRA’s) prudential standards relating to the appointment and removal of independent directors.

Where a person fails to meet the new definition of independent, an RSE licensee can apply to APRA for a determination that the person is independent based on the circumstances relating to that person, whereupon APRA can also determine that a person is not independent.

The Bill also provides for a three year transition period from the date of Royal Assent so as to provide for an orderly transition to the new arrangements.

Some of the Key Changes Proposed and the Current Position

Currently, the Boards of standard employer-sponsored superannuation funds with five or more members must maintain either equal representation of employer representatives and member representatives or an independent trustee. Under the proposed legislation, they are required to have a minimum of one-third independent directors and an independent chair on their boards. Where the RSE licensee is a group of individual trustees, one-third of these individuals must be independent. The Boards of standard employer-sponsored superannuation funds with five or more members must maintain either equal representation of employer representatives and member representatives or an independent trustee.

Currently, under section 107 of the SIS Act a trustee of an employer sponsored fund has a duty to establish procedures for appointing and removing member representatives. While under section 108 of the SIS Act a trustee of an employer sponsored fund has a duty to establish procedures for appointing and removing an independent trustee or independent member of the board of directors of the corporate trustee. The proposed new section 86 of the SIS Act provides APRA with the power to make prudential standards relating to the appointment and removal of independent directors.

The current definition of independent director in section 10 of the SIS Act is concerned with whether a person is independent of the members and the employers of the fund, and does not cover any other relationships with the RSE licensee that might affect a person’s ability to exercise independent judgement. The proposed new section 87 of the SIS Act provides two sets of conditions that if they are present would result in a person not being considered to be independent:

  • The first set (section 87(1)(a) — (c)) relates to ownership (or structural) arrangements relating to the RSE licensee; and
  • The second set (section 87(1)(d) — (f)) relates to the relationships an RSE licensee might have.

Further, under the proposed legislation, APRA is given the capacity to determine if a person is, or is not, independent and APRA’s prudential standards will set out details on how existing RSE licensees are required to transition to the new governance regime.

The Government's Case

The government argues that its reforms will modernise the superannuation industry, bringing it in line with other areas in the corporate sector such as banking and finance. In his second reading speech, the Assistant Treasurer says:

"Independent board members bring different skills and expertise and they hold other directors accountable for their conduct, particularly in relation to conflicts of interest. . . . In this regard, superannuation is lagging behind other corporate sectors, including listed companies, banks,and life and general insurers, who all, at a minimum, either have or are recommended to have a majority of independent directors with an independent chair."

The government also argues that the current composition of superannuation fund boards is outdated and not a reflection of the size and importance of the industry to the Australian economy - superannuation being referred to as the biggest individual asset after the family home for most Australians, by the Assistant Treasurer:

"Existing superannuation fund board composition requirements are outdated and no longer reflect the size of the industry. This is an industry which currently has over $2 trillion in assets, a figure that represents more than 120 percent of Australia's GDP. Based on current projections, Australia's superannuation industry is expected to grow to $9 trillion by 2040."

Opposition Reaction

Speaking against the Bill, 2015 Shadow Minister for Financial Services and Superannuation, Mr Jim Chalmers is reported as rejecting the Government's claim that independent directors would improve performance, saying:

"The Bill represents nothing more than a change to our superannuation system, which is badly motivated, ideologically driven and unwarranted,"

Mr Chalmers indicated the opposition would oppose the Bill and gave the following reported reasons:

"We will be opposing all of these amendments to the act for these five reasons: one, there is no evidence in favour of independent directors; two, the current representative model is working well . . . three, there are governance safeguards in place already; four, the proposed changes are overly prescriptive; and, five, the amendments will cost millions of dollars for fund members."

Mr Chalmers also claimed in his speech that the government had made no case for independence of the benefits claimed for it in terms of improved fund performance:

"When it comes to no evidence for independence, the Government has not been able to stack up the claim that maintaining independent directors on not-for-profit superannuation funds would improve fund performance."

The government's response to Mr Chalmers claims the opposition's resistance to the legislation stems from its relationship with the unions and the involvment of unions in the superannuation industry, reported as saying in parliament:

"What should be an uncontroversial change to our superannuation arrangement is being vehemently opposed by those opposite, because it does not accord with the wishes of their union paymasters, . . ."

Industry Reaction

The Australian Institute of Company Directors (AICD) is reported to be in favour of the proposed legislation for independent directors to be appointed to superannuation funds, but with the condition that the definition of "independent" be broadened to be more consistent with other entities regulated APRA. In its submission to the Senate Economic Legislation Committee, the chief executive of AICD, Mr John Brogden, is reported as having said that the definition of "independent" proposed in the Bill, was overly "prescriptive".

The Financial Services Council (FSC) chief executive, Ms Sally Loane is reported to have said that:

". . . the proposal was in the best interest of consumers and will deliver lower fees to working Australians. . . . There is no downside for consumers for their super funds to include a proportion of independent directors with diverse skills on their boards, . . ."

The Australian Institute of Superannuation Trustees (AIST) executive manager governance, Ms Eva Scheerlinck, is reported as saying ". . . the proposed legislation was unwarranted, not supported by evidence and would dilute the voice of member representation on the boards of the top-performing super funds".

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