The Australian federal government has released for consultation draft legislation and associated draft explanatory material to improve superannuation accountability and member outcomes.

 

A key element will be the requirement for superannuation funds to hold annual member meetings to respond to member questions on fund operations. As predicted in Guerdon Associates’ not-for-profit remuneration article last month (see HERE) and our report on how APRA has found some funds’ remuneration disclosures inadequate (see HERE), superannuation funds had better gird themselves for probing queries on their remuneration. They can do this by:

• Engaging an independent comparative review of their board and executive remuneration. Guerdon Associates’ reviews have revealed significant variations across the industry that cannot be explained by financial accountability, workload, fund purpose or performance. Members will also undertake comparisons. Be prepared, and if necessary act to amend remuneration as appropriate.
• Critically assessing whether their remuneration remains fit for purpose in terms of facilitating beneficial outcomes for members. At board level, it is apparent that not all are equal, at least in the remuneration they can command. Highly qualified independent directors can, and do, receive a premium. Likewise, not all executives are equal. Funds taking investments in-house have to pay high premiums relative to their other executives, as well as short term incentives (STIs). Yet, while STIs are market practice for CIOs, members may question whether these are fit for purpose for funds that place more emphasis on 5 and 10 year returns.
• Improving transparency. Members will inevitably ask questions regarding board and executive remuneration. Make it easier by directing them to the transparent disclosure on the fund’s website.
• Honing a succinct rationale for the framework and levels of pay. It helps to publicly disclose this along with executive and director pay levels. The why can be just as important as the how much. Having considered this already, will facilitate a coherent response to members’ questions at a general meeting.
• Reviewing the fund’s remuneration governance process. Make sure the fund has a sound governance process that minimises conflicts of interest. Again, there is potential for some funds to be embarrassed if current remuneration governance processes need to be disclosed in response to a member question at a general meeting. This can be circumvented by reviewing and improving on current governance.

 

In addition to annual member meetings, legislative amendments will improve accountability and member outcomes by:

• Replacing the current ‘scale test’ with an ‘outcomes test’ that requires trustees to undertake an annual determination considering a number of features to ensure the outcomes being delivered are in the financial interests of their members.
• Providing the Australian Prudential Regulation Authority (APRA) with enhanced capacity to refuse or cancel a MySuper authorisation, where it believes that the registrable superannuation entity (RSE) licensee may not comply with its obligations.
• Providing APRA with improved directions powers to enable it to intervene at an early stage to address prudential concerns.
• Aligning the superannuation director penalty regime with the penalty regime that applies to directors of managed investment schemes.
• Requiring people to seek approval from APRA prior to a change in ownership or control of an RSE licensee occurring.
• Enabling APRA to gather more information on the operational and managerial expenses of RSE’s.

 

All interested parties are invited to make a submission to Treasury by 11 August 2017.

See the proposed legislation and explanatory memorandum HERE.

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