The standard disclaimer that ‘past performance does not predict future results’ applies as much to Australia’s superannuation system as it does individual assets. And with $2.6 trillion in assets in the system, we need the highest standards in place to safeguard the interests of Australians who rely on those results.

    This article appeared in The Australian Financial Review on 1 August 2018 (subscription may be required).

    This month the Hayne Royal Commission will almost undoubtedly hear about poor governance practices across the superannuation sector. Without pre-empting the Commission’s important work, there is already enough evidence on the table to suggest that substantive reform is required.

    Two recent reports, by the Australian Prudential Regulation Authority and the Productivity Commission, have uncovered weaknesses and suggested that stronger governance is essential to better member outcomes. These reports did not examine industry or retail funds in isolation. Their recommendations are relevant to almost all of us, regardless of whether our retirement savings are with a retail or industry fund.

    Together these reports make it clear that governance in the superannuation sector needs to improve. Enhancing transparency, accountability and board composition should sit at the heart of this critical reform.

    Most directors across the sector clearly understand their obligation to perform their duties and to exercise their powers in the best interests of the fund beneficiaries. An enhanced set of mandatory governance practices for the superannuation sector would give the public confidence that this was uniform across the sector.

    For example, the Productivity Commission raised related party transactions as a concern, with the report saying some were “not sufficiently cognisant of members’ best interests”. According to APRA, most funds in its survey did not demonstrate active consideration of the collective skills, capabilities and experience required on their boards. The regulator pointed to a lack of clear criteria on composition, training and fit and proper policies. Both reports cite a lack of evidence of rigorous board assessment and evaluation.

    Both of these reports recommended improvements in governance and that is a concern given the importance of superannuation funds and the compulsory nature of superannuation. It requires higher, less flexible standards of governance; standards that should be set and rigorously enforced by the regulator.

    A stronger focus on board composition, particularly the value of independent directors as part of a mix of knowledge, skills and experience, would help address the concerns identified by the Productivity Commission and APRA. Strengthening the board appointment and renewal process, introducing annual assessments of board performance relative to its objectives and the performance of individual directors, publishing a board skills matrix, and third party evaluations of board and directors’ performance are all sound governance practices that support effective and high-performing boards.

    The removal of restrictions on the ability of superannuation funds to appoint independent directors to trustee boards would enhance the ability of superannuation entities to appoint directors who have the necessary skills and experience to bring value to the board, and help address concerns – whether real or perceived – regarding “insider favours”. After all, a key component of good governance is managing real and perceived conflicts of interests, and the accountability and transparency of decision-making processes. Independent directors contribute positively to the decision-making of boards, as has long been recognised in the ASX context, and should be a basic part of the governance framework of a sector so intertwined with the future prosperity of Australians.

    In addition, the promotion of greater transparency in relation to merger decisions made by superannuation boards could encourage more consolidation in the sector, with the aim of reducing the number of underperforming funds in the sector and improving member outcomes.

    The level of trust in Australia’s institutions is at a low point. Through our actions we must all contribute to turning this around. The superannuation sector will be in the spotlight over the coming weeks. We already have good options on the table from the Productivity Commission report. We have reached a point when an enhanced set of mandatory governance practices for the superannuation sector should be adopted. And while the proposals outlined above are far from exhaustive it is critical for the long-term improvement of this important sector that regulators and lawmakers act.

    Australia’s superannuation sector needs the highest levels of transparency, accountability and governance, because Australians depend on it.

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