The role of trustees in corporate master funds need to be looked at closely, says Robert MC Brown
“Trust everybody, but cut the cards” Finley Peter Dunne, American journalist (1867-1936)
It’s a rare day in the world of financial services when the media doesn’t publish some colourful commentary on the “independence”, “transparency” or “conflict of interest” issues involved in a particular transaction, relationship, board or corporation. Such issues of probity and ethics are of particular importance in the case of superannuation funds, due to the trustee arrangements under which the industry operates.
This argument is legislatively endorsed in section 52 of the Superannuation Industry (Supervision) Act (SIS Act) which requires trustees, among other things:
a) to act honestly in all matters concerning the entity;
b) to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide; and
c) to ensure that the trustee’s duties and powers are performed and exercised in the best interests of the beneficiaries.
In addition to these onerous duties, legislators claim to have focused on the importance of properly dealing with issues of superannuation fund trustees’ transparency, independence and conflicts of interest by introducing into the SIS Act the concept of equal employer/employee representation on trustee boards.
Equal representation, which was originally introduced as a political sop to demonstrate (rather than guarantee) that trade unions did not control the superannuation industry, is a strange concept. This is because a person sitting on a trustee board must not represent anyone else but the members and must act in the members’ best interests, pursuant to section 52. It is actually illegal to represent the interests of any other party, to the detriment of the members whose best interests the trustee is bound to support.
Even though the equal representation rules were introduced for the wrong reasons, they have served to support a culture amongst industry and corporate superannuation funds in which all trustees are extremely conscious of the need to act in members’ best interests, and to do so in such a manner that justice is not only done, but it is seen to be done.
One of the fastest growing segments of the superannuation industry is the master fund market. Master funds are made up of a large pool of smaller superannuation funds, which have been rolled together into an administration system, generally under the control of one trustee company that is owned by a sponsoring financial institution.
An important issue for the trustee company, the board of which usually consists of executives and directors of the sponsoring institution, is how to act independently of that institution and how to be seen to be doing so. The first step is to acknowledge that a problem might exist. Some executives and directors pay lip service to it, but in practice they take the old “what’s good for General Motors is good for America” approach.
Others accept the fundamental importance of their position as a director of the trustee, but take the view that they are able to act independently of the sponsoring institution’s board, even though their salaries are being paid by the sponsor. Others will point to the extraordinarily stringent corporate governance rules applying to the operation of the trustee company, thus ensuring that no actions can be taken which favour the sponsor over the master fund members.
Whilst at least two of these responses have some validity, they are not altogether convincing to clients suffering from poor service, high fees, low investment returns and investment choices which appear to be heavily biased towards the products of the sponsoring institution.
Such treatment can be hard to take, especially when corporate clients are used to acting independently and without any substantial contact with or influence from fund managers. Clients often forget that in a master fund environment, superannuation is usually reduced to the level of a price-driven commodity, sometimes leading to the provision of minimal service with very little direct client contact.
There is also an important subtlety, which is often overlooked in the process of examining the two contrasting superannuation delivery modes. Whereas a traditional stand-alone corporate superannuation fund simply grows (or contracts) the corpus without any commercial intent, an institutionally sponsored master fund is very much a commercial venture with key performance indicators to meet (including growth and sales targets). As a result, the former tends to emphasise the servicing of existing members, whereas the latter often develops a culture in which the writing of new business and the accumulation of funds under management (FUM) are the principal measures of success.
This FUM culture can easily subjugate all other considerations, so that whilst the trustee company’s responsibilities and independence are matters of importance, they are treated as subsidiary to the central purpose of the master fund. It’s as though talking earnestly about the trustee’s role is simply a necessary evil which must occur in order to keep regulators and clients satisfied, thus enabling a single-minded focus on the real business in hand, being the accumulation of FUM.
Even though the equal representation rules which apply to traditional corporate superannuation funds and industry funds are legally and logically flawed, they have introduced into that segment of the market a sense of seriousness about the role of trustees that, as a general rule, did not exist previously. Prior to “equal representation”, it was not uncommon to observe corporate superannuation funds being operated by senior executives as their own personal kingdoms.
I am not necessarily suggesting that all master funds are operated as the personal kingdoms of their sponsoring institutions, although that has certainly been known to happen; however, I am suggesting that the relationship between institutionally owned trustee companies and their related product offerings is often just a little too cosy and should be reformed by amendments to the SIS Act.
There is a strong case to be made for the introduction of legislation requiring at least half of the directors on the boards of institutionally owned trustee companies to be completely independent of their related institutions. No doubt, objections will be raised to this proposition on the basis of cost, necessity or the unavailability of a large enough supply of qualified directors to fulfil the roles. These types of objections are always raised against inconvenient reforms, especially those that break down the barriers of control by powerful institutions.
This is a reform that goes right to the heart of why the industry exists. The Cooper Review of the Australian superannuation system has been examining the issue and has sought submissions on it. Its introduction would be a simple and meaningful step in the interests of institutionally owned master fund members.
Furthermore, it would facilitate an important and desirable cultural shift in one of the largest segments of the superannuation market. And it would give consumers of superannuation services a stronger feeling of confidence in an industry that is long on cash flow and short on trust.
Robert MC Brown is a chartered accountant with more than 30 years’ experience in accounting, superannuation and financial planning. In 2007 he authored the landmark industry paper ‘Reinventing Financial Planning’
