The Grattan Institute’s Jim Minifie argues that the super governance reforms currently being pursued by the Government are defensible, but not the main game for members.
The Government last month introduced a bill to mandate that super fund boards have at least one-third independent directors and an independent chair. It is controversial: most non-profit funds oppose it. It should, however, be supported, though its benefits will be modest. But the real agenda to drive efficiency in the $20 billion super industry lies not in governance, but in the Government’s response to the rest of David Murray’s Financial System Inquiry recommendations.
Mandating that super funds have a majority of independent trustees or directors may seem like a must-do. After all, public companies are obliged to do so, to ensure that shareholders’ interests prevail over those of management. But the analogy with public companies only goes so far. Most non-profit funds have a ‘representative’ structure: the trustees or directors are intended to represent members via their union or employer groups. Such funds argue that while their directors or trustees are not independent of management, they do represent account holders’ interests in much the same way that an independent director would.
Still, the representative fund model is not perfect. Employers are over-represented on such boards: most account holders are now on ‘defined contribution’ plans that expose the employer to no financial risk. Increasingly, fund members are not union members, and union representatives may have interests that do not align to those of their members. Anecdotally, some smaller funds do not have all the board expertise and depth they need. There have been a few frank governance failures: APRA has intervened to install independents more than once; a large IT project by an industry fund administrator failed; financial arrangements between funds and their linked unions have also raised eyebrows.
Yet such governance failings have not stopped non-profit funds from materially outperforming for-profit funds on average over the long run. Similar representative models remain common across pension funds around the world. Where independent directors have been installed, recently in the UK, it is often to oversee for-profit funds, not non-profit funds.
And it is the for-profit finance industry that seems beset by advice and selling scandals. Australian for-profit super funds have tended to under-perform. Some maintain inferior products that are closed to new members but charge excessive fees. So for them, the case for trustee independence is strong. The Financial Services Council recognises this and asks all its members maintain a majority of independent directors.
Ironically, then, the reform would change not-for-profit boardrooms the most, even though the for-profit part of the industry has more work to do.
Yet the proposed governance changes can be defended. Two successive reviews - Cooper (2010) and Murray (2014) - recommended similar changes. (Cooper sensibly suggested a minimum of a third independent directors for representative funds, and a firm majority for for-profit funds.) They offer the prospect of improvements if implemented well. Independents may reflect the increasingly diverse membership that results from choice of fund, and give more voice to retirees. They can provide more expertise as funds and products become more complex. In smaller and less efficient funds, they may be more disposed to agree to much needed mergers.
Realistically, however, governance changes are not going to improve member outcomes much. To achieve that, Government must seize three big opportunities: market design; fund consolidation; and account consolidation. Together they could save billions each year for ordinary Australians.
First, market design. The Coalition has said it wants to split default super from industrial awards and open it to retail competition. But there is no evidence that would improve member returns. It could easily reduce them. What is needed is to impose a stronger screen on default products that would weed out the overpriced ones. That could be a tender, as proposed by Murray, or a much tougher version of the screen applied today by the Australian Prudential Regulation Authority (APRA). Alongside this, more work is needed to ensure funds report performance on a level playing field and cannot hide costs.
Second, APRA needs to pressure smaller and inefficient funds to merge with more efficient ones. Supporting reforms will be needed to help funds close costly ‘legacy’ products when they merge. Grattan’s 2015 report, Super Savings, estimated that a tender system and fund mergers could cut fees by well over a billion dollars.
Third, there is a clear opportunity to close over 10 million excess accounts, costing members hundreds of millions each year. While progress has been made on helping members close unwanted accounts, new accounts are still proliferating as people switch jobs. Anyone who starts a new job should be presented with a clear option to use - or close - their existing account.
Overall, the governance bill can be defended. It is what the Government does next that will show whether it is serious about improving member outcomes or is just taking sides in the perennial battle between union and for-profit super funds.
Jim Minifie directs the Productivity Growth Program at the Grattan Institute.