Our super system needs to emerge from its cave and expose itself to scrutiny.
In a world increasingly focused on good governance, it is not surprising attention is turning to the people and institutions responsible for the $1.2 trillion accumulated in the Australian superannuation system.
The world’s fourth-largest super pile needs to be managed efficiently, transparently and prudently. But is it?
When Paul Keating first outlined his vision for compulsory super at the National Press Club almost 20 years ago, who would have thought it would spawn one of the world’s most lucrative financial services sectors?
Indeed, the big banks have well and truly moved in, partly explaining why Australia has four of the world’s most valuable 20 banks and, as consumers, we suffer from the world’s most expensive banking system.
When it comes to super, a conga line of middle men, including fund managers, bankers and asset consultants, have made a fortune servicing the funds, which for far too long have outsourced most of their key functions.
Asset consultants tell them how to divvy up the pool, fund managers run the money, proxy advisers tell them how to vote with their stock and there are even outside providers who perform administrative and account-keeping tasks.
While industry super funds have performed well over the years, especially in regard to containing costs, some of their governance arrangements are a throwback to the old industrial- relations club.
Indeed the super minister, Chris Bowen, recently told the SuperRatings ”Day of Confrontation” conference in Melbourne that ”to walk into the operations centre of many super funds is to step back in time to 1982”.
While public companies have been forced to make enormous strides in disclosure, transparency, technology and risk management, the same can’t be said for the nation’s super funds.
The first criticism pertains to scale. How can we have Asia’s biggest super system but not a single fund ranked in the global top 100?
Mergers needed
There are clearly far too many sub-scale super funds and we need a series of major mergers, not unlike what Bill Kelty did to the union movement during the Hawke-Keating years. That merger process created giants such as the CFMEU, which has more than $100 million in assets and rates as one of the richest unions in the world.
We may yet see a push for super-fund mergers coming out of the sweeping super review being conducted by Jeremy Cooper, the former deputy chairman of the Australian Securities and Investments Commission. However, it is a shame the Rudd Government appears so reluctant to roll up its sleeves and get the process moving.
Australia’s biggest industry fund, AustralianSuper, is starting to bring more expertise in house but at $30 billion, it is still a modest operation by world standards.
However, at least AustralianSuper has voluntarily started opening itself up to greater scrutiny from its members. Each year, its 1.4 million members are offered an opportunity to attend an annual information meeting with the board and staff.
The archived version (australiansuper.com) of this year’s event in Sydney on October 7 is well worth watching as it includes a 30-minute presentation from the chief executive, Ian Silk; 20 minutes from investment committee chairman Bernie Fraser; and a useful 37-minute question-and-answer session involving members who were present and online.
The calibre of questions was certainly much better than what I’ve observed at more than 300 public company AGMs and there was another 100 waiting online when chair Elana Rubin wrapped up proceedings.
AustralianSuper appreciates direct feedback from members, in an industry that suffers from chronic disengagement.
Indeed, Silk attributed the creation of a new pensions department to issues raised at the same event three years earlier.
This year, members heard a mea culpa from Silk about the quality of administration offered by the out-sourced provider, Superpartners, although the situation is expected to improve courtesy of a significant IT investment.
The long-serving AustralianSuper chief executive also lauded the ”fantastic outcome” from a giant insurance deal worth $600 million over three years that he said would ”revolutionise the Australian insurance market”. This is an example of what can be done with scale and collective action.
If I’d been attending the information meeting, there would be a series of questions, starting with the most basic: ”Who owns AustralianSuper?”
It is, of course, a creature of its sponsoring union and employer-group organisations, which sees ACTU secretary Jeff Lawrence attending board meetings with people such as Heather Ridout, chief executive officer of the Australian Industry Group.
The right structure?
This is a throwback to the legacy that industry funds have with industrial relations and occupational health and safety. But is it the right structure for today? Do you really get the right group of people managing tens of billions of dollars when the directors are appointed to represent groups whose main mission is not to maximise investment returns for the lowest cost.
Is it any wonder AustralianSuper has never really taken a strong public position on issues such as governance and sustainability, preferring instead to out-source research or pursue advocacy through industry associations. It’s presumably all too hard, given the different perspectives in the boardroom.
Silk passionately advocates industry funds because he says their sole purpose is to maximise returns for members. But the members don’t even own the funds. It is not a mutual, in the strictest sense.
The chief executive of governance advisory company RiskMetrics, Dean Paatsch, delivered a controversial speech at the Day of Confrontation in Melbourne last month, when he claimed two sponsors of an industry fund had discovered their ownership interest had been ”transferred to individuals and shopped around for sale”.
What would happen to AustralianSuper if Heather Ridout’s AIG decided it wanted out and proposed a sale of its interest to the next generation of cowboy operators, such as the collapsed Babcock & Brown?
Another potential problem with the industry-fund model is the lack of professional independent directors and the inability of members to elect directors. While you wouldn’t want candidates running negative campaigns to get elected to something as sensitive as a super-fund board, the current system lacks direct accountability.
In most funds, members are not even told what the board and senior managers are paid.
The rather sparse 17-page AustralianSuper annual report makes a brief reference to directors receiving ”a modest fee for carrying out their duties”, although this is passed back to the unions and the employer groups that they represent.
There is no disclosure of what Silk is paid as chief executive or Mark Delaney as chief investment officer.
Industry funds should be leading the charge on issues such as governance and executive pay but they can’t do that until they practise what they preach.
When it comes to voting stock held in public companies, Paatsch from RiskMetrics told the 300-strong audience of trustees in Melbourne that ”many funds rely far too heavily on us”.
He called on the industry to strive for ”freedom from indifference” and start acting as though it was their own money they were protecting.
In a blistering critique, Paatsch said too many players in the industry ”confuse activity with results”; risk in various investment options needed more ”truth in labelling”; governance wasn’t being treated as a core competency; and the sector had failed to come up with ”a coherent position” on the Rudd Government’s proposed Carbon Pollution Reduction Scheme.
When it comes to the super industry supporting genuine research on sustainability, Paatsch said ”more money is spent on conferences than primary research”, which he estimated attracted funding of less than $1 million a year.
‘Completely disorganised‘
In summary, he labelled super funds ”far too passive” and criticised them for being ”completely disorganised” when it came to voting on Macquarie Group’s recent extraordinary $345 million divorce payment from Macquarie Airports.
While it is easy to criticise industry funds, in generating returns for members they have certainly performed far better than for-profit funds such as AMP and those run by the big four banks, largely due to the lower fees.
I’ve asked questions at many AGMs of Australia’s financial services giants but rarely does anyone raise an issue as a super fund customer. Indeed, the AMP or NAB AGM is meant to be for the shareholders who profit from the excessive expenses built into the whole super system.
If you’re not happy with your super fund, the best accountability mechanism available is voting with your feet and switching but it would be good to have other options.
Annual meetings should be compulsory, as should the release of fully audited accounts and the disclosure of executive remuneration.
I dream of a super industry that can also rise above its sponsoring organisations and de-couple itself from banking.
Imagine the impact a big four super fund would have if it were independent of the big four banks. After all, the interests of debt and equity in an economy are often in conflict, yet in Australia, we have the same financial giants allocating both.
A genuinely independent and mutually owned AustralianSuper could become a powerful force for good through strong public advocacy on issues such as governance, sustainability, executive pay and active investing.
After 20 years, it is indeed timely for the Cooper Review. Let’s hope the same parliament that created this remarkable $1.2 trillion beast can settle on a path forward that makes our super funds more accountable and better governed into the future.
Stephen Mayne is a shareholder activist and publisher of The Mayne Report. Stephen@maynereport.com.
Geoffrey Newman – The Australian
staff writers – news.com.au
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