Today the government is announcing a series of reforms that will strengthen governance, accountability and transparency in Australia's $2 trillion superannuation sector.
The measures follow through on our election commitments and follow a superannuation discussion paper that the Government released in November 2013.
These reforms have also been strongly influenced by a series of important independent reports that have made recommendations in this area, namely The Cooper Review in 2010 and The Financial System Inquiry chaired by David Murray in 2014.
The government's proposal is to enshrine in law that APRA regulated superannuation fund boards be led by an independent chair and comprise at a minimum one-third independent directors. By definition, these changes will not apply to Self-Managed Superannuation Funds (SMSFs).
This reform represents a significant departure from the current practice specified in the Superannuation Industry (Supervision) Act, which specifies that industry and corporate boards have an equal number of employer and employee representatives. The same legislation similarly contains no independent director requirements for retail superannuation boards.
Currently, funds subject to the equal representation model can only appoint one independent director, with a special application needed to APRA should they seek to appoint more.
Both the Cooper and Murray reviews made clear that the current governance model should be changed. Cooper recommended a minimum one-third, and Murray recommended a majority of independent directors, including the chair.
Such a change is sensible, as it increases the range of expertise and experience on the board. It is also consistent with the standards applied by APRA to the boards of other regulated entities such as banks and insurance companies and more broadly to ASX-listed companies which must comprise a majority of independent directors.
The proposed definition of an independent director has been adapted from that specified in the ASX Corporate Governance Council principles that apply to listed companies. An independent director in the superannuation board context should be one that is not a substantial shareholder of the trustee, does not have a material relationship with the trustee and has not been, in the past three years, an executive or director of a body that has had a material relationship with the trustee.
No doubt there will be some push back to these reforms.
One argument often raised is that funds operating under the equal representation model perform relatively well, so why the need to disrupt the status quo?
However, David Murray's Inquiry answered this question head-on, saying "there is no evidence to suggest that the performance of these funds is driven by their equal representation model."
In fact the quality of decision making is likely to be enhanced by the presence of independent directors.
A point underscored by APRA member Helen Rowell who said in a speech earlier this year, "independent directors improve decision making by bringing an objective perspective to issues the Board considers. They also hold other directors accountable for their conduct, particularly in relation to conflicts of interest. In APRA's view, the diversity of views and the experience that independent directors bring supports more robust decision making."
Powerful words indeed.
With many retail funds having adopted a majority independent governance model and with eight of the top ten industry super funds already having at least one independent member on their board, and some – like HostPlus – already having one-third of their board as independent, change is underway.
Today's reforms will build on this momentum.
Under current arrangements, directors on superannuation boards are typically appointed for a three-year period. In light of this, the government understands that for the new arrangements to be implemented, an appropriate transition period will need to apply.
Accordingly, boards will have three years from the date of Royal Assent of the legislation to implement the new rules with the proviso that any new funds established after 1 July 2016 will need to apply the one-third rule from day one.
These governance changes will also be supported by strong disclosure requirements regarding directors fees, non-monetary benefits and a director's other board positions. This will ensure accountability and transparency.
With Australia's superannuation system representing the fourth largest pool of such funds in the world and growing to $9 trillion by 2040, Australians deserve effective and strong governance arrangements. These reforms, built as they are on the recommendations of eminent and independent experts, do just that, representing a significant step forward. Josh Frydenberg is the federal Assistant Treasurer.