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“Maintaining the trust and confidence of Australians in the retirement savings system”: Speech to Morningstar Masterfunds Conference 6 September 2012
I am pleased to join you for this important conference.
As a newly arrived MP a couple of years ago, I jumped at the chance to join the Corporations and Financial Services Committee – because your sector is so important to our national wellbeing.
In particular, your products help Australians to build and manage their retirement savings.
The system is a pretty successful one – but of course when plenty of people enjoy stable,well funded retirements that is not news. When things go wrong as they do from time to time that is news.
So it is no surprise that government – and politicians of all persuasions – have a focus on maintaining the trust and confidence of Australians in the retirement savings system.
Now trust and confidence can be threatened by many things. If criminals steal retirement savings – as happened in Trio – that erodes trust.
If bad advice leads to disastrous outcomes for unsophisticated investors – as happened in Storm – that erodes trust.
If key players in the system look after their own interests ahead of the interests of their members or customers – that erodes trust.
If competition is weak and the system seems to favour some players over others – that erodes trust.
In the last two years we have seen a flood of legislation in your sector, supposedly to address these threats.
Today, I want to argue that this new law does an imperfect job of this – partly because the Gillard government has used this law to respond to other agendas. Secondly, I want to argue that some real threats have been left unaddressed.
Thirdly, I want to highlight how the Coalition plans to take a different approach.
An Imperfect Approach
Let me turn firstly to the Future of Financial Advice reforms which have recently passed into law. Supposedly this package addresses the threat to trust and confidence in the sector arising from a conflict between the interest of financial planners and of their clients.
The starting point for FOFA was the inquiry conducted by the Corporations and Financial Services Committee, a catalyst for which was the collapse of Storm Financial, widely known as the Ripoll Inquiry. The key recommendation was to impose a fiduciary duty on financial advisers, requiring them to place the interests of their clients ahead of their own – a principle of course we support.
The Ripoll Inquiry did not, however, recommend the introduction of a large and detailed set of complex new regulatory measures. In fact, the final report specifically noted that it was not an absence of regulation that was the problem; instead it was an absence of enforcement:
“The committee is of the general view that situations where investors lose their entire savings because of poor financial advice are more often a problem of enforcing existing regulations, rather than being due to regulatory inadequacy. Where financial advisers are operating outside regulatory parameters, the consequences of those actions should not necessarily be attributed to the content of the regulations.
Somewhere along the line this principle got lost.
The FOFA legislation which finally passed the Parliament implements very detailed regulatory measures, not all of which were canvassed by the Ripoll inquiry. Let me mention three: retrospective fee disclosure, banning of commissions for insurance inside superannuation and what are colloquially known as the opt-in provisions.
With many products currently in the market being ten, fifteen or more years old, the retrospective fee disclosure requirement means that our major financial services providers need to open up, and make major changes to, their legacy IT systems which supports these products. Such an exercise is always risky, expensive and deeply fraught.
I was interested to see that AMP recently informed the market that it expects the one off cost of implementing the Future of Financial Advice, Stronger Super and other regulatory changes over the next 12 to 18 months to be in the range of $60 to $75 million after tax.  No doubt its major competitors are exposed to similar expenses.
In my view there is a real question as to whether the public policy benefit of imposing this retrospective change – as opposed to a forward looking change that would affect all new clients of financial planners – is sufficient to justify the imposition of such an enormous cost across the financial sector.
Let turn to another highly contentious issue in FOFA: the banning of commissions for insurance inside superannuation sold under group superannuation policies. Many people choose to obtain life and income insurance, and total and permanent disablement insurance, through their superannuation fund. It is a cost-effective way to obtain this important insurance because they are able to pay with pre-tax dollars.
This measure will effectively discourage the operation of an existing and proven distribution channel under which many people today are educated about the most cost-effective means to obtain insurance—that is, via their superannuation fund. It is hard to see the policy logic for a measure which is likely to reduce rather than increase the number of people taking up insurance via superannuation.
But perhaps the most contentious issue of all in FOFA has been the 'opt-in' requirement — under which every financial adviser must obtain written confirmation from a client every second year that he or she still wishes to retain that adviser.
A financial planner in my own electorate gave me a telling example of why this measure might not be in the interests of clients. He had a client who is in her early 50s, who has recently been divorced, moved cities and changed her job. To compound her troubles she was then diagnosed with breast cancer.
She called him with very clear instructions. He should not bother her for the foreseeable future - her only focus was on dealing with her cancer and getting through it.
If the opt-in rules had been in place, that adviser might very well not have been able to respond to his client's specific request.
At five minutes to midnight there were some changes made to these provisions as the Bill passed the House, but it remains an extremely interventionist approach.
All of this raises the question: why does the FOFA legislation contain detailed provisions which were not recommended by the Ripoll Inquiry?
The opt-in requirement was dreamt up by Industry Super Network, the lobby group for industry super funds – and you can see why they like it. It makes very little difference to the business model of the industry funds – while doing quite an effective job of disrupting the business model used by retail funds, in which financial advisers play an important role.
No doubt it did no harm to ISN’s prospects of getting a hearing that the Minister for Financial Services and Superannuation, Bill Shorten, is a former director of the biggest of the industry super funds, Australian Super. So are two other current members of the Parliamentary Labor Party, Greg Combet and Senator Doug Cameron, and so too is the failed Labor candidate for Melbourne in the 2010 federal election, Cath Bowtell.
Let me be clear about one thing. The Coalition has no preference for any one sector of the superannuation industry over any other sector. Our only focus is on having an efficient, competitive sector which serves Australians building up savings for their retirement in the most cost-effective way.
While FOFA purports to deal with one kind of conflict of interest, it leaves another unaddressed – the conflict which is faced by an individual who happens to be both a director of a superannuation fund and an official of a union.
Under the so called equal representation model, an industry fund or a public sector fund typically has up to half of its directors appointed by one or more unions, and up to half appointed by an employer association.
There are some variations to this. Sometimes there is an independent director on the board and sometimes there is an independent chairman.
The equal representation arrangements were specifically designed in the industry superannuation fund system when it was set up by the Hawke- Keating Labor government. This had the effect of entrenching its friends in the union movement at the centre of the governance system of industry super funds.
I recently looked at the arrangements across 64 public sector and industry funds, with a total of more than $300 billion under management. I counted over 150 directors appointed by the unions, with a significant number of funds where the unions appoint at least half of the directors.
It is easy to see how these arrangements serve the interests of unions. It means a large number of well-paid directorships are allocated amongst the union mates. In some cases it seems fees paid to directors of industry super funds are pocketed by the individual, in other cases the fees are paid to the union.
But the interest of the union is not the same as the interest of a member of the superannuation fund – creating the possibility of conflict.
Some might argued that it is more theoretical than real. In my view it is a very real conflict which manifests itself in a number of ways.
Consider for example TWU Super, a fund with $2.6 billion under management and 130,000 members, with four directors appointed by the Transport Workers Union. The four directors appointed are the TWU's federal secretary Tony Sheldon and three state secretaries: Wayne Forno, Wayne Mader and Jim McGiveron.
Last year the TWU vigorously attacked changes proposed by the management of Qantas to the operation of that company, changes that management said would improve the company's financial performance. How do the directors of TWU Super, who are also union officials, think about equity investments in Qantas or other companies in the transport sector?
Members of TWU Super have a right to expect that the sole consideration exercising the minds of directors is how to maximise the financial returns generated by the fund.
Another example is in the recent failure of the merger between Vision Super and Equip Super in Victoria. Vision Super has four directors appointed by the Australian Services Union.
The merged entity was supposed to have elected directors. A member of the Equip Super fund—somebody who happened to be a senior manager at a power company and a former employer-appointed director of Equip Super—chose to seek election as a board member of the merged super fund.
This made the ASU very cross. In an email to ASU members, ASU state secretary Brian Parkinson had this to say:
As expected, employers are seeking election to workers' positions. Indeed, one such individual,…has exploited his senior management role to frustrate the election chances of ASU candidates…Management will pull out all the stops to see one of their own elected at the expense of workers.
Mr Parkinson is also a director of Vision Super. He has duties to the members of that fund – and the transaction was conceived as being in the interests of those members. When he sent this email, was he thinking of the interests of members of Vision Super – or of the ASU?
The recent Cooper Review into superannuation had some very clear findings and recommendations on fund governance:
- The equal representation system “no longer seems to achieve its original stated objective”;
- Directors are often not elected but rather are nominated by third party organisations, such as employer associations and trade unions –and in practice these organisations do not necessarily represent all employers or employees’
- The system leaves significant groups ‘unrepresented’, including most obviously those who are retired and receiving benefits payments from the fund;
- The equal representation model should no longer be mandated, and where it does apply at least one third of representatives of both members and employers should be non-associated.
Let me give a good example of how these conclusions from the Cooper Review apply to one particular superannuation fund. LG Super, which provides superannuation to employees in the local government sector in New South Wales, has a board consisting of four so called ‘employer representatives’ and four ‘member representatives.’
None of the employer representatives are current or former general managers of councils – although as a matter of law it is the general manager, and not councillors, who is the employer. One of the so-called employer representatives is Mr Sam Byrne, who used to be a Greens councillor on Marrickville Council, but is no longer even on a council.
One of the member representatives is Mr Ian Robertson, CEO of the Development and Environmental Professionals Association. This union has only 1300 members, yet the NSW Labor Government in 1997 approved a trust deed giving it a position on the board of this superannuation fund which has some 90,000 member accounts.
Unfortunately Minister Shorten has failed to act on these recommendations from the Cooper Review.
Some real threats left unaddressed
I now want to turn to some threats to trust and confidence in the retirement incomes system which in my view have not received sufficient focus.
The first is the threat of fraud and criminality.
In recent year we have seen three major financial collapses in Australia: Westpoint, Storm Financial and Trio.
Westpoint and Storm were bad enough. But Trio in my judgement is even worse.
I became aware of this issue when I was contacted by several different constituents who had been victims of the Trio collapse. Some lost the entire balance of their self-managed superannuation funds –hundreds of thousands of dollars.
When the Corporations and Financial Services Committee conducted an inquiry into Trio, we learned that $176 million had been stolen in a sophisticated fraud perpetrated by international criminals who mounted a carefully planned attack on the Australian retirement incomes system.
The fraud began in late 2003 when an existing funds manager was taken over by those involved in the fraud – but it took almost six years before the regulators APRA and ASIC intervened. It is very concerning that it took the regulators so long to act – and they did so only when notified by an alert industry participant.
We were surprised to find that there is no ongoing criminal investigation into the fraud. While a Mr Shawn Richard has been jailed, he appears to be merely the local foot soldier, while the alleged international masterminds (particularly a Mr Jack Flader) have not been effectively pursued. Mr Flader is a former US lawyer, now believed to be living in either Hong Kong or Thailand.
In my view the Trio collapse is suggestive of a dangerous degree of vulnerability in our retirement incomes system. With some $1.4 trillion of assets in the system, it is no surprise that it is an enormous honeypot to criminals both locally and internationally.
Given that today’s conference is targeted towards wraps, platforms and masterfunds, I would argue that attendees here today should be particularly concerned about the collapse of Trio.
Trio was a reputable existing funds manager, effectively operating a medium size platform and feeding investors into a range of different funds. The vulnerability of a platform business to infiltration by criminals is something which could present a serious threat to consumer confidence.
Minister for Superannuation and Financial Services Bill Shorten has shown little enthusiasm for coming to grips with this issue.
Last year he announced compensation of $55 million for those who had invested in Trio through APRA regulated funds – under provisions of the Superannuation Industry (Supervision) Act 1993 which allow for compensation in the case of fraud or theft. But this leaves some 690 people uncompensated - a combination of direct investors and those in self-managed super funds. They have been defrauded of over $100 million.
Rather than doing anything about it, Minister Shorten has criticised these Australians as “swimming outside the flags”.
One odd feature of Minister Shorten’s decision is that he granted compensation to one group at one hundred cents in the dollar– as far as I can discover the first time this has ever happened – while giving the other group nothing.
We have not yet seen a response to the Committee’s Report from the Minister. When we do, I hope that his response will demonstrate a new urgency – to direct his agencies to reopen a criminal investigation, to leave no stone unturned in finding where the money went, and to fully investigate all options for compensation under the existing law. But most important of all, I think we need to see a focus on protecting the system against further instances of industrial grade criminality.
I now want to turn to a second set of threats to trust and confidence in the retirement incomes system. Our system comprises many separate superannuation funds, some small and some big. The particular basis on which the money has been divided up – and hence the basis on which any particular employee has his or her retirement savings allocated to any one fund – is driven quite heavily by the architecture of the union movement.
I want to choose my words very carefully here. I do not claim that there is a widespread culture of corruption or failure of governance. But I do argue that these structural arrangements mean that the alignment of particular funds with particular unions create some vulnerabilities.
One such vulnerability could occur if a superannuation fund is aligned with a union which has governance problems. We have seen an example of such a union recently, with the Health Services Union being investigated by Fair Work Australia.
Former Health Services Union boss Michael Williamson was until recently a union appointed director of First State Super, a fund with some $30 billion under management. Earlier this year, the chairman of First State Super complained that he had no power to remove Mr Williamson as a trustee of that fund despite the serious allegations which had been made about Mr Williamson's conduct.
Another vulnerability can occur in small funds which may not face the same level of scrutiny as larger ones. Here I point to a $30 million investment in building company Austcorp by the Meat Industry Employees Superannuation Fund, almost all of which was lost following Austcorp’s collapse in 2009.
The Australian has reported that Mr Wally Curran, a long time secretary of the Meatworkers Union and long serving director on the board of the Fund, was paid significant consultancy fees by Austcorp. According to ASIC searches, Mr Jon Addison, a director of the Meat Industry Employees Superannuation Fund, has been at various times a director of several Austcorp group companies including Austcorp Group Limited. Now at the very least this raises questions about whether Mr Curran and Mr Addison had a conflict of interest.
The risk of small funds facing less scrutiny is compounded because there is a long tail of small superannuation funds. Let me mention for example:
- The Australian Meat Industry Superannuation Trust, with net assets of $990 million as at 30 June 2011 – note that this is different to the Meat Industry Employees Superannuation Fund I mentioned earlier
- The Health Industry Plan which had net assets of $612 million
- AUST (Q) aka The Allied Unions Superannuation Trust (Queensland) which had net assets of $193 million
- The Transport Industry Superannuation Fund which had net assets of $84 million.
In fact, on a quick review it seems there are at least twenty industry and public sector funds with assets of less than a billion dollars.
I make no criticism of the specific management of the funds I have mentioned. I do raise the question of whether it best serves the interests of members to have a large number of quite small funds – bearing in mind that members end up in these funds principally through the default arrangements rather than because they make a conscious choice.
Yet another vulnerability arises because it can sometimes seem desirable to an official of a union or another organisation to have that union or organisation enter into a transaction with a superannuation fund. If that union or organisation appoints directors to the board of the fund, then desire can be turned into action
Let me return to LG Super, which I mentioned earlier, to give an example of this issue. A company called LG Financial Services used to be owned by the Local Government and Shires Association. In 2004 this company was sold to LG Super. At the time LG Super had several directors in common with LGSA.
Presumably the transaction was attractive to the LGSA – as a way to raise funds from the sale of an asset. Was it also in the interests of the members of LG Super? Here it is relevant that under section 62 of the Superannuation Industry Supervision Act, directors must ensure that the fund is maintained solely for the purpose of providing benefits to members of the fund on their retirement, and certain related and ancillary purposes.
This is a question it seems to me can be asked about quite a number of transactions engaged in by superannuation funds. It could be asked, for example, about the purchase by the Energy Industry Superannuation Scheme of NSW of a one third stake in Chifley Financial Services, a company established by Unions NSW in 1991.
Let me turn to a third set of threats – threats to efficiency and competition which in turn drive costs which are higher than they should be.
Recently the Gillard Government has mandated the establishment of low cost ‘MySuper’ products – into which an employee’s default superannuation contributions must be paid. The Coalition supports reforms which make Australia's superannuation system more efficient, transparent and competitive. Unfortunately, the Gillard Government’s recent reforms are flawed in some key respects.
For one thing, the government failed to take this opportunity to open up the “default funds” system to competition. Default funds are specified in “Modern Awards”, which are approved by Fair Work Australia.
To be nominated as a default fund in a modern award is a valuable privilege – it means the fund will receive a steady stream of contributions.
The process by which Fair Work Australia determines which funds are nominated in modern awards is secretive, non-transparent and non-competitive.
There has been a clear bias in favour of funds with a heavy involvement of union officials in their governance – industry funds and public sector funds. Of course, a significant number of FWA Commissioners are former union officials.
An analysis conducted by the Institute of Public Affairs in 2010 found that, across 166 modern awards approved by Fair Work Australia, there were a total of 566 funds specified as default funds under those awards and, of those, 513—the vast majority—were industry or public sector funds. Australian Super was specified as a default fund in over 70 modern awards.
The introduction of the MySuper arrangements is a missed opportunity to correct these anticompetitive arrangements.
The best that Minister Shorten has been prepared to do is ask the Productivity Commission to examine default superannuation funds. The PC recently released its draft report. It suggested as one possibility the establishment of a new body independent of FWA, with the sole purpose of selecting and assessing the funds to be listed in modern awards.
Minister Shorten promptly rushed out a press release stating that the Gillard Government will preserve the role of FWA in selecting default funds.
There is another failure of competitive neutrality in the MySuper arrangements – the authorisation of “intra fund advice” as something which can be paid for through a general levy applied across an entire superannuation fund. This happens to suit the business model of the industry funds.
It is odd indeed that the Future of Financial Advice reforms impose substantial restrictions on charging for advice by financial planners, but the MySuper reforms permit funds to levy a charge on all members for advice which may be sought by only some of them.
Another threat to efficiency and competition has been in the barriers which currently exist to members wishing to move their superannuation balance from one fund to another. The Parliament has recently passed the so-called Super Stream measures, designed to streamline this process.
Today, the process is very clunky and heavily paper based – certainly to my eyes as a former executive in the telecommunications sector. For over ten years there has been a requirement that if a customer wishes to port his or her number from one mobile operator to another, the port must be completed and the service must be working on the new network in less than a day — and often it takes very much less time than that.
Mobile number portability is a good example of the efficiency benefits which can be delivered when data transfer standards and interoperable IT systems are used industry-wide.
In the Coalition we support measures to improve the efficiency, transparency and competitiveness of superannuation. We want to see a superannuation system which is easier to use for all parties; which ensures fewer lost accounts; which provides a more timely flow of money to the member accounts of superannuation fund members; and which delivers efficiencies and cost savings to employers, to funds and, ultimately therefore, to members.
The Coalition has concerns about the cost of the new system. An amount of $467 million is to be funded by levy on the industry. That is a very large sum of money – but quite inadequate transparency and justification has been provided for it.
But that cautionary note aside, if the SuperStream measures work as planned, they should increase trust and confidence in the system – and also make the system more competitive and hence cost-efficient.
A different approach under the Coalition
I have spoken about some of the threats to trust and confidence in Australia’s retirement incomes system. In the final part of my remarks I want to speak about the approach which a Coalition government would take in this area.
Our very able Shadow Minister for Financial Services and Superannuation, Senator Mathias Cormann, has been active in developing and announcing policy. We want to ensure that the financial services sector – and every Australian with superannuation – has a clear sense of the way that we will deal with these very important issues.
Firstly, we will fix up the FOFA legislation by implementing all of the 16 recommendations the Coalition made as part of the inquiry by the Corporations and Financial Services Committee into FOFA. Let me be specific about the changes we would make:
- the complete removal of the opt-in arrangements;
- the simplification and streamlining of the additional annual fee disclosure requirements;
- improving the Best Interest Duty;
- providing certainty around the provision and availability of scaled advice (that is, personal advice which is limited in scope); and
- refining the ban on commissions on risk insurance inside superannuation.
The Coalition has made a major commitment to reduce red tape. The overall objective is to find savings in the order of $1 billion a year for business. We expect that the financial services sector will be a key beneficiary of those savings.
Reform in superannuation is a key part of our agenda. In particular, we are committed to delivering genuine choice and competition in default super.
If the current government has not acted, we will move to change the current anti-competitive system for choosing default super funds.
We also plan to undertake further reforms in superannuation. We will work with all stakeholders to:
- Improve superannuation governance, by implementing a series of corporate governance reforms recommended by the Cooper Review but not progressed by Labor;
- Make it easier for consumers to properly compare super funds by working with the industry and APRA to develop a series of industry-wide standard definitions and performance benchmarks;
- Develop an appropriate process to make sure that Australians are not unfairly penalised for genuine unintended errors when making superannuation contributions;
- If and when the budget is back in surplus and government debt is back under control – revisit concessional superannuation contribution caps;
- Cut red tape and streamline employer superannuation reporting:
- Review the regulatory barriers currently restricting the availability of relevant and appropriate income stream products for Australian retirees; and
- Review the current mandated minimum payment levels for account-based pensions to assess their adequacy and appropriateness in light of current financial market conditions.
Let me speak in more detail about our support for implementing the corporate governance reforms proposed by the Cooper Review. Many of those reforms would not be viewed with any great enthusiasm by those union officials who see a position on a superannuation fund board as a nice little supplement to either their own remuneration or their union’s income.
The Coalition considers that there needs to be action on the Cooper Review recommendations to ensure that:
- There is a more appropriate provision for independent directors on superannuation fund boards;
- Directors who want to sit on multiple superannuation boards must demonstrate to APRA that they don’t have any foreseeable conflicts of interest;
- Disclosure of conflicts of interests is mandatory; and
- Directors of superannuation funds must disclose their remuneration in line with the provisions that apply for publicly listed companies and other APRA regulated sectors.
The superannuation sector is a large and growing part of our economy.
It is vital that Australians maintain trust and confidence in the sector.
The Coalition does not have a preference for any particular part of the sector. We want to see vigorous competition across the sector, as a means of delivering the best possible outcomes for fund members.
Over recent years there have been some well publicised financial disasters, many of which have affected superannuation investors. The Storm collapse led to the Ripoll inquiry and in turn the ‘Future of Financial Advice’ legislation. The Trio collapse raised some even more troubling issues to do with criminality – although to date we have not seen any significant response from the present government.
The current government’s agenda of policy changes in superannuation is conspicuous for the issues that it does not address.
It does little to address some serious deficiencies in corporate governance of superannuation funds, and leaves significant recommendations from the Cooper Review unimplemented.
It is silent about the risk that where a union is experiencing corporate governance problems, an associated superannuation fund could be affected.
It does not do enough to mandate ‘corporate grade’ disclosure of the remuneration of directors of superannuation funds.
By contrast, the Coalition has a clear reform direction in superannuation which we will be pursuing should we come to government at the next election.
We think it is essential, to ensure the maintenance of trust and confidence in the retirement incomes sector – and to ensure it discharges with maximum effectiveness the vital task of stewarding the retirement savings of millions of Australians.
 Parliamentary Joint Committee on Corporations and Financial Services , Inquiry into Financial Products and Services, November 2009
 Parliamentary Joint Committee on Corporations and Financial Services , Inquiry into Financial Products and Services, November 2009, p.87
 AMP ASX Announcement, 1H 12 results shoe AMP driving earnings growth, 16 August 2012
 Superannuation fund annual reports; team analysis Review into the Governance, Efficiency, Structure and Operation of Australia's Superannuation System, June 2010
 Parliamentary Joint Committee on Corporations and Financial Services , Inquiry into the Collapse of Trio Capital, May 2012
Minister for Financial Services and Superannuation, Media Release, “Financial Assistance to Trio’s Superannuation Fund Investors”, 13 April 2011
 Hedley Thomas, The Australian “Unionist took cash from developer after $30 million super investment”, 18 May 2012
 Louise Staley, Institute of Public Affairs, “Keeping Super Safe: A call for greater transparency from superannuation funds”, April 2010
 Productivity Commission Draft Report, “Default Superannuation Funds in Modern Awards”, June 2012
 Minister for Financial Services and Superannuation, Media Release, “Government supports evidence based and expert led process for default funds”, 22 August 2012