Superannuation funds face major shake-up in their corporate governance under controversial reforms

Updated

The Federal Government is on a collision course with unions over superannuation reform, with controversial draft legislation due to be tabled in parliament today.

Under the proposed laws, super funds will be required to have an independent chairman, and independent directors will need to comprise at least a third of a fund's board.

The Government's key target is known to be union-backed industry superannuation funds, but the proposed changes will also apply to retail, corporate and public sector funds now managing $2 trillion in retirement nest eggs.

Funds will also be required to detail in their annual reports whether they have a majority of independent directors on an "if not, why not" basis under similar rules that apply to ASX-listed companies.

The reforms would force dramatic change to industry funds backed by unions and employer groups.

The Government's pursuit of industry superannuation funds in particular comes amid concerns about a lack of transparency and links between the union movement and the boards controlling the industry superannuation sector.

The draft legislation is also timely for the Government, as the Royal Commission into Trade Union Governance and Corruption highlights incidents of alleged misconduct and conflicts of interest between trade unions and employers.

Unveiling the proposed changes, Assistant Treasurer Josh Frydenberg said the Federal Government was delivering on a commitment to improve the governance of superannuation funds.

"Not only does superannuation represent the hard-earned retirement savings of Australians, it is already the second largest asset held by Australian households," he said.

"Given the size of the superannuation system, and its importance in funding the retirement of Australians, good governance is absolutely critical.

"Independent directors bring additional experience and expertise to boards making a valuable contribution to their decision making.

"If you're a teacher, or if you're a nurse, and you've got $100,000 of your hard earned savings in superannuation, you want the people on the board to have the best experience, and the best diversity of views in order to get the best possible outcomes for you."

Successful funds targeted despite scandals

The proposed governance shakeup has been cautiously welcomed by Industry Super Australia (ISA) which represents union-backed not-profit superannuation funds.

But ISA Deputy Chief Executive Robbie Campo said successful industry funds were being targeted despite current scandals in the wealth management industry.

"The watchful eyes and questioning minds of industry super fund directors have not only delivered the best performing funds, they have avoided the widespread consumer losses and scandals which have engulfed the major banks and wealth managers over recent years," he said.

"We would caution against a 'one size fits all' approach which would impose costly obligations on not-for-profit super funds in the absence of evidence to demonstrate the benefits to our members.

"Tackling governance problems in other parts of the finance sector should be the priority."

Matt Linden from Industry Super Australia, which represents union-backed not-for-profit superannuation funds, said there should not be a one-size-fits-all approach.

"We support efforts to improve governance and transparency in the financial services sector in response to the multiple scandals in banking, insurance and wealth management, but we do question why the most significant changes appear to be reserved for successful not-for-profit super funds," he said.

The superannuation system now comprises more than 120 per cent of Australia's gross domestic product (GDP) and is anticipated to grow to from $2 trillion to $9 trillion by 2040.

The number of Australians over 65 and seeking to access their retirement savings is expected to double by 2054-2055.

The proposed reforms will apply to all superannuation funds regulated by the Australian Prudential Regulation Authority, with the exception of self-managed funds.

Government's proposal for majority independent directors and an independent chairman mirrors the Labor government Cooper Review commissioned in 2010.

The legislation - if passed - allows for a three-year transition period to allow funds to reconstitute their boards under the new governance rules.

Follow Peter Ryan on Twitter @peter_f_ryan and on his Main Street blog.

Topics: superannuation, business-economics-and-finance, federal-government, australia

First posted