New research reveals super funds under increasing scrutiny

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Super funds under-prepared for independent directors and increasing scrutiny

  • 22 July 2014
  • Australia, Melbourne

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The evolution of superannuation Trustee Boards is picking up pace, but not all funds are ready to appoint independent directors, according to new research from Mercer into the governance of Australian superannuation funds, which revealed 57% of funds surveyed do not currently have independent directors on their Trustee boards.

The research, the first of its kind in the Australian superannuation industry since the introduction of new APRA regulations, surveyed 33 super fund CEOs, Fund Secretaries and Governance, Risk and Compliance Managers.

The Superannuation Governance survey delved into attitudes towards independent directors, and despite strong signals from the Government that the inclusion of independent directors on super fund boards could soon be mandated, 11 of the 19 funds who don’t currently have independent Trustee Directors don’t believe they will make changes.  Eight thought it was probable or possible that they would appoint independent directors within the next two years, but five of that eight said they would do so only if it becomes a legal requirement.

Pam McAlister, Partner and Senior Governance Consultant at Mercer said, “It’s hard to argue super funds should be held to a different standard of governance to those applicable to Australian listed companies and Insurers.  They all have requirements for a majority of independent directors on the board, but we believe the super industry should remain focused on ensuring the right mix of skills and experience, not just on independence, however that concept may be defined.”

“It’s a different world today for Trustee Boards – they need expertise in investment, governance, risk management, remuneration, insurance and marketing, along with the interpersonal skills to enable a diverse group of people to work seamlessly together.”

Of the fourteen funds that did have independent directors: eight had an independent Chair of a Committee – most commonly an audit related committee; only four had both an independent Chair of the Board and a Committee; three had neither an independent Board nor Committee Chair.

Funds were also asked about the confidence of their Trustee Boards in decision making, with the results wavering depending on the topic. On the big issues such as setting fund strategy, risk management, strategic asset allocation or selecting a new CEO, confidence was high.  However, confidence dropped dramatically for decisions around selecting or replacing investment managers, medium-term dynamic investment decisions and effective member communications and marketing strategies.

Mercer’s research also found 66% of funds surveyed have no formal succession plans for Trustee Directors.  Where formal plans do exist for some role they all cover member nominated directors, 71% cover employer representative directors, but less than half (43%) have plans for the succession of independent directors.

“The apparent lack of succession planning within many funds is worrying.  The pool of talent for independent trustees in Australia is limited and well-run funds should have clear succession plans to protect the future security and stability of the fund,” Ms McAlister said.

Eighty eight per cent of funds surveyed paid their Board Chair, with the average being $60,000 a year.  Independent directors are usually paid and Mercer believes it will become the norm in the future to pay all Trustee Directors.

“For years, super funds have been voting on remuneration reports for public companies in which they have held an investment; now the light is being directed towards the funds themselves and the resultant glare has the potential to be blinding if not correctly handled through clearly articulated remuneration policy.” Ms McAlister said.

Encouragingly, the vast majority of funds surveyed (29) have a set of investment beliefs, which Mercer believes can impact the investment governance of a fund and potentially members’ returns.  The process of identifying and articulating investment beliefs can be challenging, with conflict potentially emerging when Trustee Boards start diving into core value and belief systems. However, the clarity of focus that emerges can pay dividends when crisis events occur from time to time.

The research also questioned the state of insurance governance.  Twenty seven per cent of funds plan to review their insurance carrier by market tender.

“Insurance is fast becoming one of the big issues in Australia’s superannuation industry.  We believe the industry will be forced to examine how current default benefits and disability definitions are impacting on premiums and how those increased premiums are in turn impacting on members’ retirement funds,” said Ms McAlister.

“ Scrutiny on superannuation funds from members, regulators, the government and the media is increasing and governance requirements are changing.  We believe that funds should approach these changes as an opportunity for improvement, rather than as a ‘tick the box’ compliance exercise.”

“Mercer’s research reveals an interesting picture of how prepared super funds are to adapt to a changing governance landscape.  We don’t believe there is any cause for overall alarm, but there certainly is no room for complacency either,” Ms McAlister concluded.

 

About Mercer

Mercer is a global leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s 20,000 employees are based in 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 55,000 employees worldwide and annual revenue exceeding $12 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. Follow Mercer on Twitter @MercerAU

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