Senate

Second Reading Speech

Senator McGRATH (Queensland-Assistant Minister to the Prime Minister)

I move:

That this bill be now read a second time.

I seek leave to have the second reading speeches incorporated in Hansard.

Leave granted.

The speeches read as follows-

TREASURY LAWS AMENDMENT (IMPROVING ACCOUNTABILITY AND MEMBER OUTCOMES IN SUPERANNUATION MEASURES NO. 1) BILL 2017

This bill amends the Corporations Act 2001, the Superannuation Industry (Supervision) Act 1993, and the Financial Sector (Collection of Data) Act 2001 to give every day Australians more power over their superannuation providers and a stronger prudential framework to deliver a more transparent and accountable compulsory retirement savings system.

The measures in this bill are part of a broader package of Government reforms that are squarely focused on protecting members' money and members' interests.

It is a comprehensive package that will help deliver all Australians a strong and modern superannuation system with a stronger prudential regulator that is solely focused on delivering outcomes for all Australians who rely on these funds to secure their retirement.

2017 marks 25 years since the introduction of compulsory superannuation in Australia. In that time, the system has grown from around $136 billion in 1992 to over $2.3 trillion today. APRA regulated superannuation funds manage around $1.4 trillion of the hard earned deferred wages on behalf of Australian workers.

The Turnbull Government believes that given the compulsory nature of superannuation, Australians rightly expect the industry to be held to the highest standards of transparency and accountability.

The reforms in this bill and the broader package of member-focused reforms will ensure the superannuation system has a strong foundation today and into the future.

Australia's compulsory superannuation system must at all times prioritise the financial interests of members above vested interests in the industry whether government, bank executives, shareholders, directors, employers or trade unions. And, the legislative and regulatory framework underpinning the system must facilitate this in practice.

Many of the measures in this bill have been recommended by past reviews into superannuation, commissioned by both Coalition and Labor governments. These are sensible reforms that are already being embedded in the practices of high performing funds.

The package has been broadly welcomed by industry and consumers groups alike. CHOICE Head of Campaigns and Policy, Erin Turner said, "the superannuation system needs a shake-up and it's why we welcome the Federal Government's announcement that it's taking a consumer-first approach to reform."

Outcomes test

Under the law, MySuper is defined as a simple, standardised 'no frills' superannuation product with regulated fees. Individuals who do not actively choose their own fund or investment option must be defaulted into a MySuper product.

This means that typically, MySuper members are younger and not proactively engaging with their superannuation. For this reason trustees of MySuper products are subject to additional obligations, including the need to ensure that they promote the financial interests of members.

The current law includes a 'scale test' under which MySuper trustees must consider whether a fund has sufficient size to operate efficiently. This bill will replace the 'scale test' with a broader 'outcomes test'.

It will strengthen all default MySuper products offered by superannuation funds across the industry as at June 2016 including:

46 MySuper products offered by retail funds;

43 MySuper products offered by industry funds;

15 MySuper products offered by corporate funds; and

11 MySuper products offered by public sector funds.

It will achieve this by introducing a requirement for trustees to undertake a stronger, broader annual assessment of their MySuper product outcomes to ensure they are promoting the financial interests of MySuper members with almost 15 million accounts across the system.

Under the new outcomes test, trustees will have to consider all aspects of their MySuper offering for example consideration will need to be given to ensuring returns, fees, investment and insurance strategies - including whether insurance premiums are inappropriately eroding retirement savings - as well as the scale of the fund promote the financial interests of members.

They will also have to compare the performance of their MySuper offering with other comparable MySuper products. Trustees will have to do this annually.

Importantly, to ensure the new outcomes test delivers greater transparency, trustees will also be required to publicly release their determination of whether or not they are promoting the financial interests of members and a summary of the assessment and comparisons that lead to the determination.

These changes will ensure that trustees, who have a fiduciary obligation to regularly assess the quality of their MySuper offering; the findings are transparent and address any weaknesses that they identify.

To be clear, the 'outcomes test' will not weaken or lessen a trustee's primary obligation to promote the financial interests of their MySuper members, including through net returns -it will strengthen it.

The new outcomes test will also enhance APRA's ability to assess how trustees are working to improve the quality of MySuper products and meeting their stated strategic objectives. It will also give APRA stronger grounds for engagement with trustees where it has concerns.

Outside of MySuper, there are a diversity of products that are not subject to standardisation under the law. A member who has made an active choice about their superannuation product typically chooses their investment strategy on the advice of their financial adviser. These are referred to as 'choice members'.

During consultation, some stakeholders said that the outcomes test should be extended to all superannuation choice products, not just default MySuper products. There are fundamental legal differences between the default MySuper sector and the 'choice' sector.

On 11 August this year, APRA wrote to all RSE licensees to advise that it intends to consult on a proposal to apply an outcomes test to all products, not just default MySuper products. As with the MySuper outcomes test, this would include consideration of net investment returns, expenses and costs, insurance, and other benefits and services provided to choice members.

The Government believes this is an efficient means through which the choice sector can be strengthened for the benefit of members and agrees with APRA's proposal and expects it to be implemented.

This will ensure that quality outcomes are being delivered and the financial interests of all members are promoted across all superannuation products.

MySuper Authorisation

There are currently 115 MySuper products on the market today. These MySuper products offer a wide range of returns and charge a wide range of fees. As a result, there are concerns that the current MySuper authorisation process is not ensuring that all MySuper products are of sufficient quality.

This bill will amend the law to give APRA more discretion over the authorisation and cancellation of authority to offer a MySuper product.

Given the additional obligations that apply to MySuper trustees, we want to ensure that APRA will only authorise a trustee if it has confidence they are likely to comply with these obligations.

We also want to ensure that APRA has the power to cancel a trustee's authorisation if it has reason to believe that the trustee will no longer comply with their obligations.

These changes to the MySuper authorisation process will give APRA the power to protect the interests of the millions of disengaged members, or members who have not made an active choice about how their savings are invested.

Direction Powers

In a compulsory system of the size and significance of our superannuation system, it is critical that the prudential regulator has a strong regulatory toolkit to protect the interests of fund members.

To date, APRA has largely had to rely on powers of 'moral-suasion' to protect the interests of superannuation fund members.

The Government believes that in order to ensure confidence in the system, APRA should have the capacity to take quick and decisive action to safeguard members' interests where it has significant concerns about a fund's operation.

It also needs appropriate powers to step in and ensure that trustees are meeting their fiduciary obligations.

A strong regulator is crucial for ensuring confidence in the $2.3 trillion superannuation system.

This bill will give APRA the ability to take preventative or corrective action where it has prudential concerns about a superannuation fund or if it is concerned that a fund is not acting in the best interests of members.

For example, if APRA were to have serious concerns with the operations of a subsidiary company wholly owned by a superannuation fund that provides services to members, APRA can direct the subsidiary entity to undertake a particular course of action to protect members' interests.

Similarly, if APRA were to have serious concerns about the actions of a particular trustee director which could impact member outcomes, these directions powers will enable APRA to intervene and direct the board to remove a trustee director.

This is clearly in the best interests of fund members.

Ownership and Control

This bill will also give APRA the power to reject a change in the ownership of a corporate trustee.

Sadly, we can still remember the collapse of Trio Capital in 2009 and the significant impact it had on the lives of many Australians, including thousands of members of APRA-regulated superannuation funds. The collapse of Trio Capital, described as the largest superannuation fraud in Australian history, highlighted the consequences of not having appropriate people in control of superannuation savings.

That is why, given the potential detrimental outcomes that may arise through the mismanagement of funds, we believe that no one should be able to own or control a trustee without APRA's approval.

Director Penalties

This bill will also strengthen the accountability of trustee directors by making them subject to civil and criminal penalties for breaches of their fiduciary duties.

This was a recommendation of the Financial System Inquiry which the Government accepted in 2015.

It is anomalous that trustees do not currently face civil or criminal penalties for breaching their duties.

These penalties include a maximum five years' jail for serious criminal conduct, for example, fraud; and up to $420,000 in civil penalties per director.

Annual Member Meetings

The law today imposes no legal requirement upon funds, who are the custodians of members' compulsory retirement savings to be subject to questioning from members about how their money is invested, the performance of the fund, how their money is spent on marketing or sponsorships.

We believe that it is time for this to change. And we are not alone. Australian Institute of Superannuation Trustees, Eva Scheerlinck has said, "Providing a means for members to engage with the people managing their hard earned superannuation is a good way to identify those issues which are of most interest to members."

As such, this bill will require trustees to hold annual member meetings where members have the opportunity to ask questions and get answers, not just of trustees but also of fund executives, auditors and actuaries.

To provide flexibility and minimise compliance costs, trustees will have the option to hold annual members' meetings electronically.

Annual General Meetings are a longstanding feature of Australia's publically listed companies in which superannuation funds invest their members' money.

Reporting Standards

A compulsory superannuation system must be transparent and accountable for the way in which it spends members' money.

APRA currently has the power to make reporting standards to capture fund expenses relating to investments more granular and transparent. However, it is unable to require funds to report the same detailed information about other expenses including for example, detailed information about financial arrangements with related parties, sponsorships, marketing and other expenditure.

All fund expenses ultimately impact their members' eventual retirement income and all expenses should be required to be transparently disclosed.

As such, the measures in this bill will enable APRA to make reporting standards that require funds to provide detailed expense information in relation to their operations and management.

This will introduce much needed transparency and give members and the regulator much fuller understanding of how funds are spending members' money and whether this is consistent with their fiduciary obligation to act in the best interests of members.

Sally Loane, the CEO of the Financial Services Council, welcomed the package of reforms and in particular, noted that, "The FSC strongly supports all proposals which give consumers more power and greater transparency over one of their most important assets - their superannuation savings."

Portfolio Holdings Disclosure

Finally, this bill will also boost transparency by giving members more information about fund investments. These changes will also improve confidence in the system by ensuring members can see where their funds are being invested and that they are being invested in their best interests.

It will do this by introducing a workable arrangement for portfolio holdings disclosure.

Under the changes in this bill, funds will be required to disclose portfolio holdings in respect to assets held directly and through associated entities, including initial investments made into non-associated entities.

This approach will significantly reduce the complexity of the current law - which was introduced by the former Labor Government in 2012 but has never commenced operation.

Australia's superannuation system is often regarded as one of the world's leading retirement savings systems. However, out of 25 markets surveyed by international market financial analysts Morningstar, Australia is the only one that has not implemented some form of portfolio holdings disclosure.

The portfolio holdings disclosure measure in this bill will ensure Australia's superannuation system remains consistent with international best practice.

Conclusion

Once again I want to make it clear that Government is focused on ensuring Australia's superannuation system delivers outcomes for members first and foremost rather than protecting the vested interests of the industry.

That is, a system that encourages people to participate actively, that ensures transparency to facilitate informed decisions, and one that gives people the confidence that their retirement savings are invested wisely.

And, most importantly, we must have a superannuation system with a strong regulatory framework that protects members' money and members' interests.

I'm confident the measures in this bill will achieve these outcomes.

Full details of the measures are contained in the explanatory memorandum.

SUPERANNUATION LAWS AMENDMENT (STRENGTHENING TRUSTEE ARRANGEMENTS) BILL 2017

This bill amends the Superannuation Industry (Supervision) Act 1993 to modernise and strengthen the foundations of Australia's compulsory superannuation system.

It achieves this by introducing a strong and consistent definition of independence and a consistent minimum legal requirement for at least one third independent directors with an independent chair, across all superannuation funds regulated by the Australian Prudential Regulation Authority (APRA).

This bill is part of a broader package of Government reforms that are squarely focused on protecting members' money and members' interests. These are important changes that will ensure all Australians, regardless of the fund they are in, can have confidence that the people entrusted to manage their hard-earned wages have the appropriate mix of skills and expertise to protect and grow their retirement savings solely in the interests of members.

This bill also amends the Governance of Australian Government Superannuation Schemes Act 2011 to ensure that the Australian Government's main civilian and military superannuation schemes are also subject to the same high standards through complying with the new independence requirements.

It has been a quarter of a century since the introduction of compulsory superannuation in Australia. In that time, the size and significance of the system has changed enormously - both for individuals and the economy more broadly.

For individuals, superannuation is now most Australians' second largest asset after the family home. The total size of funds under management has grown from around $136 billion in 1992 to over $2.3 trillion today - in excess of a 1,500% percent increase over that time. Incredibly, that figure is projected to double to $4 trillion in just over a decade.

Make no mistake about it, Australia's superannuation system has grown into what it is today largely by virtue of successive government policy to compel individuals to defer a portion of their wages - today, 9.5% - for their future retirement income.

It is always important to remind ourselves that this money is the property of each and every hard working Australian superannuation fund member. Not the government; not the industry; not the bank executives; not the shareholders; not the employers; and not the trade unions.

During the past 25 years the nature of the superannuation industry and the funds themselves has changed markedly.

Superannuation funds regulated by APRA now hold around $1.4 trillion in assets on behalf of the hard working Australian people.

Significant industry consolidation has occurred and funds have grown much larger and more complex. It is appropriate that the foundations underpinning the system are updated to reflect this change.

The previous Labor Government commissioned a 'Super System Review' that considered the governance arrangements in the superannuation system. This review, led by Jeremy Cooper recommended that, at the very least, equal representation trustee boards should have a minimum one-third 'non-associated' directors, although a requirement for a majority of independent directors was preferred.

In forming this recommendation, the Panel noted in its Final Report that, "it had come to the view that changes in the industry over time and certain implementation practices mean that equal representation no longer seems to achieve its original stated objective."

The Cooper Review Panel made the case for its recommendation on the basis of a number of key structural changes that have taken place in the system since the equal representation governance structure was established in the SIS Act in 1993.

These included:

1.

The substantial shift away from single-employer defined benefit funds that were dominant in 1993 and the introduction of fund choice and prevalence of defined contribution schemes. This materially changed, and in many cases, severed the once close relationship between an employer and super fund.

2.

The fact that most 'employer' and 'employee' representatives are nominated by third party organisations such as employer associations and trade unions.

It noted the implications of this included the perception of democracy that equal representation appears to embed is not always the reality.

Further, it creates at least the perception that individual directors are required to answer to, or are dictated to by, the organisation that appointed them.

3.

The potential for the large numbers of employer and employee organisations with interests in a fund can lead to larger than necessary board sizes.

4.

Equal representation leaves significant groups 'unrepresented'. In particular, it highlighted pensioners, future post-retirement members and members' who have exercised choice.

The most recent Intergenerational Report, published in 2015 bears this out showing that by 2055, the number of Australians aged 65 and over is projected to more than double.

There is a further compelling argument for the need to introduce a minimum requirement for independent directors on superannuation fund boards - that is to ensure a board can be comprised of a sufficiently diverse, skilled and experienced set of directors.

There can be no argument that members of superannuation funds, the hardworking Australian people, deserve the best and brightest minds sitting around the board tables of Australia's superannuation funds.

A second review, the 2014 Financial System Inquiry led by David Murray, initiated under a Coalition Government, agreed that there should be a change to the governance arrangements that apply to the superannuation industry.

However, the FSI recommended that all public offer funds should have a majority of independent directors, including an independent chair.

While the Government agrees with both of these review findings, that a majority of independent directors would be preferable, we recognise that having a consistent minimum standard of one-third independent directors on trustee boards represents an important step forward and is better than continuing with none.

Some for-profit retail funds, that do not follow the equal representation model under the law, comply with a Financial Services Council industry standard requiring its members to have a majority of independent directors and an independent chair.

The not for profit sector has also developed a governance code. Some might suggest that this means there is no need for this legislation.

However, there is no guarantee every participant in the system will be covered. Treasury analysis suggests that in 2016, the percentage of funds not covered by any industry body was 44 per cent.

The Government believes that all superannuation members have a right to expect high standards of governance, enshrined in the law, including independent thinking and judgement that is free from conflict of interest underpinning how their money is managed.

To ensure the bill delivers on its objective, it empowers APRA to make determinations about whether a person satisfies the new definition of independence.

A trustee will be able to apply to APRA for a determination that a potential director is able to exercise independent judgement if they may not meet the strict definition in the law.

This bill provides a three-year transitional period for trustee boards to have at least one-third independent directors.

It will also ensure that the new requirements are enforceable by APRA.

At its heart, the case for a consistent minimum standard across all types of superannuation fund boards for independent directors is simple.

Independent directors will strengthen corporate governance in the superannuation sector, especially in relation to conflicts management, and related party transactions including, choice of investments, arrangements with service providers, directors' fees, sponsorships, marketing activities, advertising and payments to nominating bodies.

The proposed requirements for independent trustee directors are less than what some industry superannuation funds themselves expect of the entities in which they invest members' money.

For example, the Governance Guidelines of the Australian Council of Superannuation Investors highlight the importance of company directors exercising independent judgement, not just in relation to management but also into relation to related parties and other affiliates.

Under this bill, it will be a matter for trustees to determine how the remaining two-thirds of the board is comprised.

Boards will be able to choose to have the remaining directors split between sponsoring organisation representatives if they consider it appropriate.

It will ensure our compulsory superannuation system is well-equipped for the next quarter of a century and beyond.

This bill does not favour one part of the industry over another - it applies equally to industry funds, corporate funds, retail funds and public sector funds.

It is about lifting governance standards across the entire industry in the interests of members.

Members of all funds deserve to have their interests placed first.

This bill will help to ensure that this happens in future.

There is too much at stake to allow these sensible reforms to be delayed by industry self-interest any longer.

Full details about the amendments are contained in the explanatory memorandum.

Ordered that further consideration of the second reading of these bills be adjourned to the first sitting day of the next period of sittings, in accordance with standing order 111.