When the Coalition came to power a year ago it promised a big shake-up in the corporate governance standards of the country's $1.6 trillion superannuation.
Fast forward to today and the Abbott government has made haste to dilute the Future of Financial Advice (FOFA) reforms after some heavy lobbying by the big financial institutions.
But issues of corporate governance seem to have ground to a halt. These include the composition of superannuation fund boards and the role of default funds in the modern award system - areas which have rightly attracted a lot of heated debate in the past few years.
The Finance Minister Mathias Cormann is yet to make a decision but the talk is he will make one in the next few months. In a statement he said: "The government is currently considering the outcomes of the consultation paper process and will make an announcement as soon as that consideration has been finalised."
There is no arguing the fact that industry funds have out performed retail funds over long periods of time but the superannuation system is far from perfect.
One of the concerns from a corporate governance aspect is the lack of transparency and the allegations over the years of financial links between industry super funds and unions due to the close relationship including half of its board being composed of union officials.
This was put on full display in the Royal Commission into Trade Union Governance and Corruption, which kicked off in March. On July 2 the royal commission focussed on the nexus between the Transport Workers Union and TWU Super, a fund that was set up in the 1980s, has more than 140,000 members and an estimated $3.3 billion in assets, according to its 2013 annual report.
Some of the bombshell revelations from the commission included up to $1 million flowing from the super fund into the union coffers in 2013. This included $200,000 to directors nominated by TWU, $500,000 in reimbursements for salaries and expenses of a number of superannuation liaison officers (SLOs) and $100,000 in sponsorship. The royal commission heard: "These SLOs were employees of the TWU but their salaries were in part paid by TWU Super. Clearly, TWU Super is an important revenue stream for the TWU."
Given TWU Super is a public offer fund, which means not everyone is a member of the TWU, such questions about the flow of money from the super fund to the union become even more relevant, along with the need to ensure that the system of default funds is above reproach.
There are 1.2 million people employed in the transport industry and eight awards that cover the industry. If the rule of thumb is that 70 per cent of employees don't pick their superannuation fund, then it isn't unreasonable to assume that tens of thousands of employees default into the TWU Super fund. In dollar terms this would be in the order of hundreds of millions of dollars a year flowing into the fund, which is not insignificant. The Financial Services Council estimates $9 billion a year goes into default funds.
Whether the Fair Work Commission (FWC) is the correct place to select default funds remains the big question. But to allow employers to select a default fund without any checks or balances would create another set of problems.
At the end of the day the government needs to set up a system that isn't conflicted and that can spit out a short list of default funds based on long term net returns.
Another area that needs to be addressed is the composition of boards. There are 52 industry funds, 38 public funds, 108 corporate funds and 127 retail funds, which include funds owned by the big banks and AMP. The composition of many industry funds is a 50:50 split between union backed directors and employer backed directors.
Board composition on super funds was first addressed in a review of the entire superannuation sector by Jeremy Cooper in 2010, which recommended government and industry fund boards move from the current composition to one third being independent directors and the remainder split between union-backed directors and employer-backed directors.
The former Labor government adopted some of the Cooper recommendations, including making remuneration more transparent, but it steered away from the thorny issue of board composition, arguably to keep the unions on side.
After the Commonwealth Bank financial planning scandal and the wind-back of FOFA it is imperative that Australians trust the system of superannuation. That means ditching some of the sector's archaic practices, including conflicts of interest and replacing it with a system that protects consumers and is suitable for the 21st century.
