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The banks' divided loyalties are super’s true governance problem

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  Published: 29 May 2015

The banks and their lobbyists, the Financial Services Council, would have us believe that governance is merely about who sits round a board table.

Governance is much more than that.

It encompasses the objectives of an organisation and upholds the systems and culture that underpin its sense of purpose.

What is becoming increasingly apparent is that the commercial objectives and governance of bank-owned super funds is jarringly at odds with the primary objective of the superannuation system.

The retirement savings of many Australians are parked in the banks’ wealth management divisions which run their super funds. These are the same divisions that have allowed financial and insurance advice scandals to take hold, costing hundreds of thousands of customers millions in lost savings. After years of stalling, they are now being forced to clean up their act by the authorities.

It is a case study in the terrible mismatch between the banks’ central objective of generating profits and their duty to put the best interests of their customers first.

It also raises questions about the banks’ wealth divisions and how they run super.

For example, how do their super fund boards reconcile the commercial interests of the parent bank with the best interests of super fund members? Or are they prioritising profits over returns to members?

Is the habitual underperformance of bank-owned funds compared with not-for-profit funds due to the same divided loyalties?

The opaque governance of bank-owned funds gives little insight into how they reconcile this conflict in favour of members, if at all.

These are the real issues at the heart of the super governance debate and given the cost to our retirement system and economy, taxpayers deserve some answers.

What we do know is that if the bank-owned sector had matched the average returns of Australia’s not-for-profit sector over the last decade, their members would have around $39.5 billion more in their accounts.

Instead, they have failed to meet the OECD average in the last 10 years, putting them among the most inefficient funds in the world.

This underperformance is dragging down super’s objective of maximising the returns of as many Australians as possible so they can live self-sufficiently in retirement. It’s also a serious drain on the national budget. Every dollar of profit taken from super accounts by bank-owned funds translates into many more dollars taxpayers have to stump up for age pension outlays.

When supporters of the profit-driven model advocate policy positions that push the preservation and retirement age higher and higher, legislators must bear in mind their motivation. The longer you have to work for your nest egg, the bigger their profits.

And when supporters of the profit-driven model try to alter the board composition of their more successful, not-for-profit competitors, it is not a cosmetic change they are seeking. The commercial imperative is still at work.

The banks’ lobbyists insist the ASX standard of “independent chairs” and “majority independent directors” must be mandated for all super funds, claiming it is the international benchmark for governance.

In fact, this is a standard applied to listed companies, not pension funds, and reflects the banks’ commercial view of the world in which super exists as a revenue-creating product.

The claim that the ASX sets the international benchmark is incorrect. The representative trustee system used by not-for-profit funds is the prevailing model of pension governance across the OECD. The bank-owned funds are the odd ones out.

Furthermore, APRA, which oversees the super industry, holds funds to a much higher governance standard than listed companies. Super fund directors’ duties are based on trust law and prudential standards developed and enforced by the regulator.

APRA can formally investigate a super fund, impose conditions on a fund’s licence, disqualify people from their position or from holding other senior industry roles, permanently revoke a trustee’s approval and appoint a replacement trustee. Its powers are at least equivalent to those of the ASX and ASIC.

APRA’s annual “fit and proper” test ensures super boards possess the skills to govern the fund and its focus is on the entire governance framework, including risk management and behavioural norms, rather than just board composition.

As for who sits at the table, APRA calls for ‘sound’ and ‘prudent’ trustees who, most importantly, are able to carry out the fundamental duty of offering reasonable and shrewd judgement in the best interests of beneficiaries.

The question for bank-owned funds is which beneficiaries?

Published in The Australian on Monday 18 May 2015.

*The above material, whilst correct at the time of publication may include references or statements which are no longer current.

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