Australian pension funds face greater governance and investment regulations

Australian pension funds will face a greater scrutiny of their corporate governance and risk management policies that will impact investment decisions in sweeping government changes released yesterday.

Australia’s Minister for Financial Services and Superannuation, Bill Shorten (pictured), unveiled key elements of the Stronger Super reforms, which the Government claims will increase administrative efficiency and lower fees to members.

These changes include the launch of “MySuper”, a simplified, low-cost, default option.

MySuper products will have a single, diversified investment strategy and will be offered at a standard set of fees generally available to all members.

The Government will require MySuper trustees to disclose a targeted rate of return over a rolling 10-year period, and a level of risk that a trustee deems is appropriate for members.

Each fund will be able to offer one MySuper product.

The Government has allowed trustees to build a lifecycle element into the single MySuper investment strategy they offer, allowing funds to scale back risk as MySuper members approach retirement.

From October 1, 2013, employers must make contributions to a fund offering a MySuper product for employees who have not chosen their own fund. By July 1, 2017, funds will have to transfer their default balances to a MySuper product, Shorten says.

There has been concern in the industry that the MySuper reforms will lead funds to move more assets into passive management, to cut costs.

This could have wide-ranging consequences, with some fearing a concentration in the Australian share market caused by money flowing to the companies with greatest market capitalisation.

The reforms also aim to increase transparency around investment, with new requirements that Australian Prudential Regulation Authority-regulated funds must consider additional factors relating to their investment strategies.

These include the expected costs, expected taxation consequences and the availability of valuation information.

The Government has also asked regulators to ensure that all APRA-regulated funds disclose their proxy voting policies and procedures, as well as publish their voting behaviour to members.

The Government has also beefed up regulation around governance, with trustees facing greater scrutiny and standards from regulators.

These include introducing a duty for trustees and directors to give priority to the interests of members.

The requirement for individual directors to manage conflicts of interest will also be strengthened.

The “standard of care, skill and diligence” required of trustees will also be increased to that of a “prudent person of business”.

The duties of individual directors of corporate trustees will also be clarified to include that they act honestly and exercise independent judgment.

Directors of corporate trustees will also be required to include in their decision-making consideration for the impact on “the environment, the community and the fund’s reputation”.

The government supports a voluntary code of governance developed by the superannuation industry in consultation with regulators.

Some Australian funds have raised concerns about the cost of compliance, while others have already been re-shaping their offerings to meet the likely changes.

“I’m confident BT Super for Life, with some tweaking, will meet MySuper requirements,” says Melanie Evans, head of superannuation and platforms at BT Financial Group, whose group manages $59 billion of superannuation money.

However, funds with fewer members say the cost of compliance could be high and question the Government’s claim that the reforms will produce savings for members.

Michelle Griffiths, chief executive of AvSuper, a fund with 6000 members in the aviation industry says compliance costs will be onerous for her fund.

“The Government suggests considerable savings can be made, although in our view it is unlikely that all members will share in the future cost savings, especially after the significant costs likely to be incurred in making what is sure to be considerable system and governance framework changes,” says Griffiths.

“I note the Government does not propose financial subsidisation or tax relief to offset the costs super funds will incur and be required to pass on to those members the Government is seeking to achieve better outcomes for.”

Legislation introducing the Stronger Super reforms will be introduced to Federal Parliament in several tranches over the coming months and into the first half of next year.

Draft legislation for the MySuper reforms is expected to be released in the next few weeks, says Shorten.

He says the Government is committed to increasing compulsory superannuation contributions to 12 per cent. By 2050 about one in four Australians will have reached retirement age, compared with one in seven today.

The Minister was not available for an interview.