Andrew Leigh

Superannuation Legislation Amendment (Trustee Governance) Bill 2015

House of Representatives

20 October 2015

Labor's position is to oppose the Superannuation Legislation Amendment (Trustee Governance) Bill 2015, as previous opposition speakers have noted. The government is proposing to end more than two decades of successful joint governance by employer and employee nominated fund directors and instead force boards to take on both an independent chair and one-third independent directors. It is passing strange that a so-called 'liberal party' is seeking to mandate how independent investment funds structure their activity.

It is clear, as I will outline in my speech, that the effect of the government's proposals would be to increase administrative costs for funds and thereby drive down member returns. Perhaps we should not be surprised that a so-called 'liberal party' that opposes the use of markets in tackling climate change is again wanting additional red tape when it comes to Australia's superannuation funds. The Mckell Institute has nicely summarised the government's bizarre motivations on the issue by asking: 'When a system is working better than the alternative, why tamper with it?' Alas, I am concerned that this is being driven by ideology and not by evidence.

The superannuation industry now has assets valued at $1.6 trillion, set to increase over the coming decades. The 2010 Super System Review, the Cooper review, estimated that Australian superannuation savings will exceed $6 trillion by 2035. The number of Australians 65 and over seeking to access their retirement savings is expected to double by mid-century. That pool of savings has been important. We have compulsory superannuation because of two benefits that superannuation savings bring to the rest of the community. One is reduced reliance on the age pension. The second is that having a large pool of domestic savings can have benefits for the national economy at times when access to overseas funds is limited. We saw this in the global financial crisis, when Australia's pool of superannuation funds was important for ensuring that certain loan markets did not dry up.

So it is appropriate that we provide some tax concessions to the superannuation sector, although, as Labor has argued, those superannuation tax concessions, in our view, are neither fair nor sustainable. But it is absolutely important that we get our superannuation governance settings right, and it is vital that we are guided in this by evidence and not by ideology. The evidence is clear. The studies show that having more independent directors on boards does not automatically lead to better results.

Mr Laming: It sure helps!

Dr Leigh: I am afraid it does not, Member for Bowman, and I am happy to go to those studies in a moment for you. Studies show that Australians get higher returns from superannuation funds that are governed by employer and employee nominated fund directors. SuperRatings shows industry funds with employer-employee boards have outperformed retail funds by 1.66 per cent over the past decade. That means, if you are in the average industry fund rather than the average retail fund, your retirement savings are $16,000 higher than if you had been in the average retail equivalent. Multiply that over the course of a working life and you can see someone in an industry fund ending up with retirement earnings which are equivalent to what they would have gotten if they had spent an additional year in the labour market. Put another way, the typical retail fund investor has to work another year to get the retirement savings that the typical industry fund investor gets. And yet we see those opposite, as so often, going into bat for the worst-performing part of the sector.

McKell Institute research found that not-for-profit superannuation funds generate 1.8 per cent higher returns for their members. The institute concludes that not-for-profit superannuation funds allow investors to retire eight years earlier than if they had invested in a for-profit fund—even higher than the one year that I mentioned a moment ago. The McKell Institute concludes:

With superannuation funds, the not-forprofit representative trustee model has outperformed its for-profit appointed trustee competitors on virtually every important criteria of superannuation performance over a long period.

The representative governance model in superannuation has promoted higher levels of diversity amongst trustees, more effectively minimises conflicts and interest and generates higher net returns for fund members.

According to Industry Super Australia, had all superannuation funds had the same returns as these not-for-profit funds, Australian retirement savings would be $88 billion higher than they are today. Over the past financial year, we can look at the top 10 best-performing super funds, and in that list we find eight industry funds and just two retail funds. But, if we push out the time horizon further and we look at the past decade, we find 10 industry funds and no retail funds. This is not just in Australia. Internationally, research on 296 financial firms in 30 countries found that those with more independent directors experienced the worst returns in the global financial crisis. Given the strong performance of the industry superannuation funds, it is not surprising that the former Assistant Treasurer—sorry; we need to clarify that, don't we; we have had three Assistant Treasurers under this government; I meant the member for Kooyong—recently switched his work superannuation from a retail fund to an industry fund.

These changes are going to mean lower returns for members and higher fees and expenses. A research paper by Monica Tan and Marie-Anne Cam from the University of New South Wales found management fees and operating expenses rise with the number of independent trustees sitting on a fund's board. They found that larger boards are linked to higher investment management fees and expenses, operating expenses and trustee and audit fees. In short, a larger number of independent trustees do not benefit superannuation fund members. Studies in the US have found similar results. Peter Tufano and Matthew Sevick studied the US mutual fund industry and found that larger boards are linked to higher fees for shareholders due to higher bureaucracy costs. A 2006 review of research on the relationship between chair or board independence in the US mutual fund industry, undertaken by the Office of Economic Analysis of the Securities and Exchange Commission, found:

… no consistent evidence that chair or board independence is associated with lower fees and/or higher returns for fund shareholders …

Importantly, the higher fees and expenses that will result from the government's proposals will be paid for out of members' savings. That means that more independent directors will translate to lower after-fee returns.

The importance of fees has been highlighted by a superannuation report, carried out by the Grattan Institute, that finds no correlation between fees and returns. They argue that the policy and rationale in superannuation governance should be to get fees as low as possible. That was the goal of the former Labor government's MySuper reforms, which targeted getting fees down, because we understood that higher fees eroded post-fee returns.

In order to meet the government's proposed rules, industry funds will have to find and appoint 64 new chairs and bring in 295 new directors. Industry Super estimates this would cost up to $168 million and those higher fees and expenses will be paid for out of members' savings. So much for cutting red tape. If having more independent directors on super-fund boards does not improve returns—and may actually reduce them—why is the Turnbull government so fixated on making this change?

Former New South Wales Liberal Treasurer Peter Collins has referred to these changes as 'designed to damage the current industry super fund model, for no good reason' and 'There is no evidence to support that having a majority of independent directors will give rise to better performance or better governance.' He notes these measures 'totally change the game' and 'The current legislation was never flagged in the previous term of the parliament and represents a very significant departure from what they did propose.' Industry Super Australia CEO David Whiteley criticised the bill for 'dismantling the governance structure of the successful non-profit super sector while not addressing the scandals and underperformance of the bank owned sector'.

What these studies have found is that the most important characteristic of corporate governance is not independence, it is representation. Representative governance is seen, widely, as an important way that corporate governance structures attempt to resolve the collective-action problem of ensuring corporations act in the interests of members and shareholders.

The government's motivation is—as always, in superannuation—purely ideological. The coalition opposed universal superannuation in 1992. In 1996 they came to office promising not to touch the pace of the increases and, then, went ahead and froze them. In 2013 they came to office promising not to slow the rate at which universal superannuation increased but, in 2014, they froze it again. In fact, I cannot recall a single occasion in which coalition members, in this House, have ever cast a vote in favour of superannuation that benefits ordinary Australians.

This ideology does not just apply to their opposition to superannuation. This government has a pathological dislike of unions and wants to weaken the role of unions in every aspect of public life. They do not care that unions play an important role in mitigating wage inequality, in keeping Australians safe at work, ensuring that workers in tough sectors, such as construction and mining, can go home to their families at the end of the day. The government are studiously avoiding the very facts that have been outlined in careful academic research, that combined governance of funds by employer and employee representatives delivers the best outcomes for Australia's super savers.

The proposed superannuation governance changes are being driven by prejudice, rather than by evidence. They will cost Australian households thousands of dollars in retirement incomes. Australia's industry super funds do not need drastic governance changes. What they need is a government that is less focused on vendettas and more focused on making sure that all Australians can enjoy a dignified retirement. Our superannuation system is too important to be left to dogma and ideology.