Despite being a growing reservoir of funds under management, this critically important pool of capital is confronting mounting problems collating and disseminating key data in a timely manner.
The ratings house is pinning its growth strategy on a revamped methodology that increases the emphasis on governance to 25 per cent – a timely move considering APRA’s proposed reforms.
Smaller super funds ignored in governance push
Allan Murphy
by Allan Murphy*
The bigger players in the super funds industry are focussed on the principles of government intervention in a system which “ain’t broke” and the definition of “independent”. Meanwhile, there is another group of long-established funds which risk becoming collateral damage in the Government’s plan to introduce a minimum composition of one-third independent directors, including an independent chair, on all boards.
Quite apart from the principles and definitions, imposition of the minimum one-third independent directors requirement has the potential to significantly increase costs for many smaller funds.
Many of the remaining corporate funds continue to operate under the equal representation rules which have served this sector well for many years. With half of the trustee board appointed by the sponsoring employer and half directly elected by the members, there is generally a healthy tension between the benefit of the members (which must be paramount) and the needs of the employer, who often provides very generous financial support. The directors on the trustee board of such funds are often not paid – hence the potentially significant increase in operating costs.
One fund has quoted a projected operating cost increase of between 10 per cent and 25 per cent should the board be required to appoint a minimum of one-third independent directors who, after all, are very unlikely to take on the responsibilities without appropriate remuneration. A board with some paid and some unpaid directors may not be realistic to maintain; payment to all directors could then push costs even higher.
Imposing independent director requirements on funds which are only open to specific groups (non-public offer) was not part of the report from the FSI, whose recommendations were specifically targeted at the much larger public offer funds.
While some industry commentators are suggesting that funds under $5 billion should be closed or merged, this ignores the important place that many much smaller funds have in the industry. RSE licensing and MySuper have closed down all but the most tenacious smaller funds. These funds have complied with everything requested of them and, in many cases, have provided superior investment returns and comparable if not lower fees than many of their far bigger counterparts.
Smaller funds can, and do, obtain scale through judicious service provider arrangements. Corporate Fund sponsors often provide benefits far in excess of standard requirements. Who wouldn’t want 13 per cent company contributions and free administration and insurance in a fund governed by a board comprised of highly qualified people who are all fund members with “skin in the game”? Add in long-term above median investment performance and there is little to validate calls for closure.
There is also minimal justification for insisting on significant governance changes in such funds. Trustee boards already have a clear obligation to ensure adequate skills coverage, including the appointment of independent directors if that is considered necessary to cover any skills gaps. APRA’s powers include capacity to assess boards and to persuade boards to enact changes where they are needed.
Imposing independent director requirements will have a disproportionate cost impact on smaller funds. The government should think again about its “one size fits all” approach to governance reforms.
*Allan Murphy is general manager, superannuation, at BOC Limited, South Pacific, where he has been for 12 years. Prior that he spent nine years as superannuation manager at Pioneer International.
