[Editor's note: Eva Scheerlinck is the CEO of the Australian Institute of Superannuation Trustees (AIST), the peak representative body for the profit-to-members superannuation sector. Industry funds have come through the Royal Commission largely unscathed, in complete contrast to the retail fund industry. It is a stunning success for industry funds, a traditional target of Coalition governments, and the Commission’s findings will reshape the superannuation landscape forever.
For example, the largest industry fund, AustralianSuper, reported over $1 billion of new customer inflows in each of July and August 2018, double the same period last year. Gains were mainly transfers from retail funds. It's therefore an opportune time to hear what the CEO is thinking. This is a transcript of her introduction at the 2018 AIST Super Investment Conference in Cairns on 5 September 2018.]
It’s almost unbelievable we’ve had to defend our outperformance over retail super funds. Our statistics have been questioned, as has our asset mix. The establishment and use of collective vehicles like IFM and ISPT have also been attacked. Decades of being on the defensive and yet continuously delivering results for our members.
But now it turns out our strongest response to our detractors has been our success. In the last four months or so, there has been a significant shift in the discourse. The Productivity Commission affirmed the profits-to-members sector's consistent outperformance and for once people listened. The message was freely accepted as fact.
Then came Round 5 of the Royal Commission’s hearings into superannuation containing a 223-page report with a strong focus on fund governance. Yet there was no significant criticism of equal representation, nor the role of unions, nor employer groups. There was no mention of the need for independent directors on our boards.
[Editor's note: 'equal representation' is where the trustees of a fund come equally from employer representatives and representatives of the fund members, usually nominated by related unions.]
Instead, structural and governance issues in the retail sector were called out. Indeed, the Royal Commission proved to be a damning indictment on the retail super funds with the Commission concluding that it was open to find that eight retail funds and related parties covering almost the entire retail sector may have engaged in over 150 separate instances of misconduct. These ranged from fee gouging, charging commissions banned under FOFA, cross-selling members into higher fee products to the snail-paced transfer of members to MySuper products to preserve both grandfathered commissions and fees-for-no-service.
The report noted that ASIC expects that compensation due to members will top $1 billion for problems relating to fees-for-no-service alone. In sharp contrast, the Commission identified two instances of possible misconduct involving profit-to-member funds out of a total of more than 50 such funds.
So we were not surprised two weeks ago amid a leadership spill in Canberra, and a new ministry being sworn in, that the Government conceded defeat on its governance legislation requiring a third of independent directors on profit-for-member boards and an independent chair. Only this morning came the announcement that the Government is also abandoning raising the retirement age to 70. Both these policy areas have been at the heart of AIST advocacy for many years and we are relieved to see some common sense come into the discourse.
Many battles have for now been won
So many of the things we have been staunchly defending seem at least for now to have been won. We are not, however, naïve enough to think that many challenges don’t lie ahead still. As everyone here would be well aware, bull markets do not last forever. While investment returns to members of profit-to-member funds have far exceeded expectations over the past year or two, this paradoxically raises the likelihood of a market downturn soon.
Another challenge for profit-to-member funds is responding to an increased focus from both the media and some super fund members on how funds are responding to ESG issues such as climate change. Increasingly, funds will need to provide more transparency around ESG investments.
Compulsory super has been around for over 25 years, and we are seeing how the unique collective approach in the profit-to-members sector is delivering value for members. Just yesterday, IFM Investors which is owned by 27 industry funds announced it was giving investors a 7.5% rebate on management fees after better-than-expected returns.
The values-based leadership at the heart of decision-making in our industry, where member outcomes are always front and centre, delivers results. But we are not complacent. The Royal Commission has signalled it will consider recommending a range of radical reforms to superannuation in its final report due next February. It has also posed some important questions.
Trustees have a special and privileged job
With regard to governance, the closing submission asks whether there are structures in the retail sector that raise inherent problems for trustees being able to meet their fiduciary obligations. AIST's answer to this is a resounding ‘yes’. Being a superannuation trustee is a special and privileged job. Trustees are the stewards of other people’s money. A trustee director cannot be focussed on returning profits to members when he or she is also having to return profits to shareholders or to prop up related parties. You cannot serve two masters and look after members' best interests at the same time. Retail trustees with their independent directors were unable to protect members from fee gouging and other misconduct. And the regulators have proved themselves unable to stop the bad behaviour.
Therefore, AIST believes there is no place for retail funds in MySuper where members in a compulsory super system have the right to expect the highest level of protection. We will be advocating this position to the Commission, to the regulators and to the Parliament. There exists now a real opportunity for us to capitalise on our outperformance, our governance structure that puts members first and to take our market lead to a whole new level.
Eva Scheerlinck is the CEO of the Australian Institute of Superannuation Trustees (AIST). Graham Hand, Managing Editor of Cuffelinks, chaired a session at the 2018 AIST Conference.