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2016-2017
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
SENATE
SUPERANNUATION LAWS AMENDMENT
(STRENGTHENING TRUSTEE ARRANGEMENTS) BILL 2017
EXPLANATORY MEMORANDUM
(Circulated by authority of the
Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP)
Table of contents
Glossary ................................................................................................. 5
General outline and financial impact....................................................... 7
Chapter 1 Overview of strengthening trustee arrangements.......... 9
Chapter 2 RSE licensees ..............................................................11
Chapter 3 Regulation impact statement -- RSE licensees ...........31
Chapter 4 Board of CSC ...............................................................59
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
AIST Australian Institute of Superannuation
Trustees
APRA Australian Prudential Regulation Authority
ASIC Australian Securities and Investments
Commission
ASX Australian Securities Exchange
ASX principles ASX Corporate Governance Council's
Corporate Governance Principles and
Recommendations
Bill Superannuation Laws Amendment
(Strengthening Trustee Arrangements) Bill
2017
Cooper Review Review of the Governance, Efficiency,
Structure and Operation of Australia's
Superannuation System
Corporations Act Corporations Act 2001
CSC Commonwealth Superannuation Corporation
CSC Board Trustee board of the Commonwealth
Superannuation Corporation
FSC Financial Services Council
FSI Financial System Inquiry
Governance Act Governance of Australian Government
Superannuation Schemes Act 2011
RSE Registrable superannuation entity
SMSF Self-managed superannuation funds
SIS Act Superannuation Industry (Supervision)
Act 1993
5
General outline and financial impact
RSE licensees
Schedule 1 to this Bill amends the Superannuation Industry (Supervision)
Act 1993 (SIS Act) to introduce new trustee arrangements requiring
registrable superannuation (RSE) licensees to have at least one-third
independent directors and for the Chair of the Board of directors to be one
of these independent directors.
Date of effect: The day after the Bill receives Royal Assent.
Proposal announced: The Government committed (in September 2013) to
improving governance in superannuation by aligning corporate
governance in superannuation more closely with the corporate governance
principles applicable to Australian Securities Exchange (ASX) listed
companies. In progressing this commitment, the Government released a
discussion paper Better regulation and governance, enhanced
transparency and improved competition in superannuation on
28 November 2013. On 26 June 2015, the Government released exposure
draft legislation to improve governance in superannuation.
Financial impact: Nil.
Human rights implications: Schedules 1 do not raise any human rights
issue. See Statement of Compatibility with Human Rights -- Chapter 2,
paragraphs 2.118 to 2.121.
Compliance cost impact: $8.5 million in start-up costs and a further
$12.3 million in ongoing costs annually.
Summary of regulation impact statement -- RSE licensees
Regulation impact on business:
Impact: The amendments will result in $8.5 million in start-up costs and a
further $12.3 million in ongoing costs annually.
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
Main points:
• Legislation to require a minimum of one-third of directors to
be 'independent' with an independent Chair to commence on
the day after Royal Assent, with a three year transition
period.
• The primary costs that will be incurred relate to increased
remuneration costs associated with the new governance
requirements. Other significant costs include search and
engagement costs and legal costs (such as changes to
constitutions and trust deeds).
• The impact on industry is expected to be $8.5 million for
start-up costs and a further $12.3 million annually for
ongoing costs.
• Success will be measured by how quickly superannuation
trustee boards move to a minimum of one-third independent
directors. However, the ultimate yardstick will be at the end
of the three-year transition period to assess how many
trustees are compliant with the requirements.
Board of CSC
Schedule 2 to this Bill amends the Governance of Australian Government
Superannuation Schemes Act 2011 (Governance Act), to enable the trustee
board of the Commonwealth Superannuation Corporation (CSC Board) to
comply with the independence requirements set out in Schedule 1.
Date of effect: The day after the Bill receives Royal Assent.
Proposal announced: No announcement was made.
Financial impact: Nil.
Human rights implications: This Schedule does not raise any human
rights issue. See Statement of Compatibility with Human Rights --
Chapter 4, paragraphs 4.14 to 4.17.
Compliance cost impact: Nil.
8
Chapter 1
Overview of strengthening trustee
arrangements
Outline of chapter
1.1 This Bill contains amendments to the SIS Act and the
Governance Act that will strengthen superannuation trustee arrangements
by introducing minimum independence requirements for RSE licensees
and the CSC Board.
1.2 This chapter provides an overview of those amendments.
Context of amendments
1.3 Compulsory superannuation was introduced in Australia 25
years ago. During this time, the size and significance of the
superannuation system has grown exponentially both for individual
Australians and the economy more broadly. The size of funds under
management has grown from around $136 billion to more than $2 trillion
- an almost 1,300 per cent increase.
1.4 The size and complexity of RSE licensees and their business
operations has also changed significantly since the current board
composition requirements were introduced with the SIS Act. In particular,
funds themselves have opened themselves up to a wider range of
employers and members, competing actively for market share beyond
traditional sectoral bases and across multiple industries.
1.5 Two major independent reviews of Australia's financial and
superannuation systems (2014 Financial System Inquiry (FSI) Report and
the 2010 Review of the Governance, Efficiency, Structure and Operation
of Australia's Superannuation System (Cooper Review)) concluded that
greater independence on superannuation trustee boards was desirable.
1.6 This reform is important because independent directors bring
different skills and expertise and they can hold other directors accountable
for their conduct, particularly in relation to conflicts of interest.
1.7 The equal representation rule, under which some superannuation
trustee boards are either required to or can elect to be comprised solely of
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
employer and member representatives, with no independent directors, has
not changed significantly since the introduction of compulsory
superannuation in 1992.
1.8 Governance standards have been strengthened in relation to
ASX listed entities as well as other prudentially supervised industries such
as banking and insurance. An absence of any minimum requirement for
independent directors means the superannuation industry has fallen behind
standards that apply to other entities.
1.9 Already superannuation funds are recognising the need for more
independent directors on their boards, with many having moved or
moving in this direction -- including retail funds that are members of the
Financial Services Council (FSC) and some industry funds.
1.10 Introduction of minimum independence requirements for
directors or RSE licensees is consistent with the recommendations of the
two major independent reviews of Australia's financial and
superannuation systems (the FSI and the Cooper Review). For example,
the FSI Report said 'given ... [the] ... diversity of fund membership, it is
more important for directors to be independent, skilled and accountable
than representative' (FSI Report, page 135).
Summary of new law
1.11 Schedule 1 to this Bill amends the SIS Act to require trustees of
registrable superannuation entities (RSEs) (commonly referred to as RSE
licensees) that have a board of trustees to have a minimum of one-third
independent directors including an independent Chair. The Bill also
amends the SIS Act to require RSE licensees that are a group of individual
trustees to have at least one-third of the trustees that are independent.
1.12 Schedule 2 to this Bill amends the Governance Act to enable the
restructure of the CSC Board to comply with the increased independence
requirements, set out in Schedule 1, by the end of the transition period.
10
Chapter 2
RSE licensees
Outline of chapter
2.1 Schedule 1 to this Bill amends the SIS Act to introduce
minimum independence requirements for RSE licensees. RSE licensees
that have a board of trustees must have at least one-third independent
directors and the Chair of the Board is to be an independent director. RSE
licensees that are a group of individual trustees must have at least
one-third of the trustees that are independent.
2.2 This Schedule introduces a definition of independent. The new
definition excludes individuals with a current or recent relationship with
the RSE licensee or related bodies corporate and organisations
representing employer sponsors and members.
2.3 Under the new definition of independent, persons who would
not be considered to be independent include: those who are substantial
shareholders of the RSE licensee; those who have, or have had, within the
last three years, a material business relationship with the RSE licensee; or
those who have served as a director or executive officer of the RSE
licensee.
2.4 The new minimum independence requirements will replace the
existing requirements in Part 9 of the SIS Act that require equal
representation of employer representatives and member representatives on
the boards of standard employer-sponsored superannuation funds of five
or more members. The Australian Prudential Regulation Authority's
(APRA) prudential standards also set requirements relating to governance,
including requirements relating to the Board's policies on nomination,
appointment and removal of directors and board composition.
2.5 If a person fails to meet the new definition of independent, but
the RSE licensee forms the view that the person is sufficiently
independent of the RSE licensee and other relevant bodies, an RSE
licensee can apply to APRA for a determination that the person is
independent based on the circumstances relating to that person. APRA can
also determine that a person is not independent.
2.6 To facilitate an orderly transition to the new arrangements, this
Schedule provides for a three-year transition period commencing on the
day after the Bill receives the Royal Assent.
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
2.7 All legislative references in this chapter are to the SIS Act
unless otherwise stated.
Context of amendments
2.8 Minimum requirements for independent directors on
superannuation trustee boards will strengthen the superannuation system.
2.9 The size and complexity of many RSE licensees has increased
significantly since the current board composition requirements were
introduced with the SIS Act. Governance arrangements that were
appropriate in 1993 are no longer consistent with modern practice.
2.10 Requiring a minimum proportion of independent directors on the
board of RSE licensees is intended to improve their governance.
Independent directors bring to the board additional judgement, expertise
and perspectives. Independent directors are more likely to be free of the
types of conflicts that may cause other directors (either intentionally or
unintentionally) to act in the interests of a related party or a subset of
members rather than the fund's entire membership.
2.11 The presence of independent directors is expected to test and
challenge trustee decision making processes in a way that contributes to
beneficial member outcomes. A requirement for a minimum number of
independent directors will also broaden the talent pool from which
directors are drawn, allowing boards to access greater diversity of skills
and experience.
2.12 A greater number of independent directors will increase the
accountability of management and strengthen oversight of the fund--
helping to support the board's critical obligation to put member interests
ahead of any other interests.
2.13 Increasing the level of independence on RSE licensee boards
will also strengthen governance and accountability in the superannuation
system. The final report of the FSI suggested that good governance can
increase returns to members (page 133 of the FSI Final Report).
2.14 Both the Cooper Review and the FSI concluded that the addition
of independent directors on trustee boards would be consistent with
international best practice on corporate governance.
2.15 The FSI concluded that the equal representation model is less
relevant in the current superannuation system, which predominantly
12
RSE licensees
consists of public offer funds with large numbers of employers across
multiple industries.
2.16 A similar conclusion was reached by the earlier Cooper Review,
which examined the equal representation model and found that although it
was an important part of the governance structure back in 1993, 'changes
in the industry over time and certain implementation practices mean that
equal representation no longer seems to achieve its original ... objective'
(page 53 of the Cooper Review).
2.17 Until recently, a large proportion of retail fund boards typically
comprised of a majority of executives of the RSE licensee. In 2012 the
FSC introduced a standard requiring its members to appoint to trustee
boards a majority of independent directors as well as an independent
Chair. This standard became mandatory for members from 1 July 2014.
However, not all retail funds are FSC members; nor can APRA enforce
compliance with the standard.
2.18 The Australian Institute of Superannuation Trustees (AIST)
introduced a 'Governance Code' for its members on 1 July 2017. This will
become mandatory for members from 1 July 2018. However, AIST
members are required to adopt the 'equal representation' model. For this
reason, the AIST Code does not prescribe minimum requirements for
independent directors. Further, the code does not apply beyond AIST's
membership and APRA cannot enforce compliance with it.
2.19 This Schedule ensures that all RSE licensees are subject to a
consistent and enforceable minimum requirement for independent
directors.
2.20 Remaining positions on trustee boards can still be filled by equal
numbers of sponsoring organisation representatives.
Summary of new law
2.21 APRA-regulated superannuation funds are required to operate
under trustee arrangements. Under this framework, a corporate trustee
overseen by a number of individual directors, or a group of individual
trustees, is responsible for managing a superannuation fund's assets on
behalf of the fund's members and beneficiaries. The trustee is known as
an RSE licensee as it operates under an RSE licence issued by APRA.
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
2.22 A feature of the current governance framework is the
requirement for some trustee boards to have equal representation. The
SIS Act requires that the board of a non-public offer fund for a standard
employer-sponsored fund of five or more members must consist of equal
numbers of 'employer representatives' and 'member representatives'. This
reflects that originally the vast majority of funds were single employer
sponsor corporate funds or funds representing a single, homogenous
industry; and equal representation ensured both stakeholder groups had
oversight and responsibility for the fund's operations.
2.23 In the 25 years since the introduction of the SIS Act, there has
been substantial change to both the nature of employment in Australia and
the structure of the superannuation industry. This means that there is less
justification for the arrangements that exist today to remain unchanged.
2.24 This Schedule requires RSE licensees to have a minimum of
one-third independent directors and an independent Chair on their boards.
Where the trustee is a group of individual trustees, one-third of these
individuals must be independent.
2.25 This Schedule introduces a definition of independent. It
includes, among others, persons who are not substantial shareholders of
the RSE licensee or who do not have or have not had within the last three
years a material business relationship with the licensee.
2.26 Where a person does not satisfy the definition of independent,
but the RSE licensee considers that the person has the ability to exercise
independent judgement in performing the role of a director of an RSE
licensee, the RSE licensee may apply to APRA for a determination that
the person is independent. APRA can also determine that a person is not
independent if APRA is reasonably satisfied that the person is unlikely to
be able to exercise independent judgement in the role.
2.27 Existing RSE licensees that comply with transition requirements
set out in APRA's prudential standards will not have to comply with the
new arrangements until the end of a three-year transition period, which
will commence from Royal Assent. The purpose of the transition period
and APRA's prudential standards relating to transition is to facilitate an
orderly transition to the new arrangements.
2.28 RSE licensees that notify APRA that they intend to cease
operating by the end of the transition period and meet the applicable
requirements of APRA's prudential standards will not have to comply
with the new requirements.
2.29 Trustees licensed by APRA after Royal Assent will need to
comply with the new requirements from the time they are licensed.
14
RSE licensees
2.30 The new governance rules will not apply to self-managed
superannuation funds (SMSFs). They will also not apply to a fund that has
an acting trustee appointed under section 134 of Part 17.
Comparison of key features of new law and current law
New law Current law
All RSE licensees are required to Boards of standard
have a minimum of one-third employer-sponsored superannuation
independent directors including an funds with five or more members
independent Chair on their boards. must maintain either equal
Where the RSE licensee is a group of representation of employer
individual trustees, one-third of these representatives and member
individuals must be independent. representatives or an independent
trustee.
APRA has the power to make A trustee of an employer-sponsored
prudential standards relating to the fund has a duty to establish
appointment and removal of procedures for appointing and
independent directors. removing member representatives.
A trustee of an employer-sponsored
fund has a duty to establish
procedures for appointing and
removing an independent trustee or
independent member of the board of
directors of the corporate trustee.
A person would not be considered The definition of independent director
independent in two sets of in the SIS Act is concerned with
circumstances. The first set relates to whether a person is independent of
ownership arrangements relating to the members and the employers of the
the RSE licensee. The second set fund, and does not cover any other
relates to the relationships an RSE relationships with the RSE licensee
licensee might have. that might affect a person's ability to
exercise independent judgement.
APRA has the capacity to determine No equivalent.
if a person is, or is not, independent.
APRA's prudential standards will set No equivalent.
out details on how existing RSE
licensees are required to transition to
the new governance regime.
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
Detailed explanation of new law
2.31 The existing equal representation provisions will be replaced
with a new requirement for RSE licensees to have a minimum one-third
independent directors, including an independent Chair.
2.32 RSE licensees will be free to determine the composition of the
remainder of the board to best serve the interests of fund members.
2.33 The appointment of directors, including independent directors,
to RSE licensees is subject to APRA's prudential standards relating to
appointments. This includes compliance with the fit and proper test as
well as the requirement for directors, collectively, to have the necessary
skills, knowledge and experience to understand the risks of the institution,
including its legal and prudential obligations, and to ensure that the
institution is managed in an appropriate way taking into account these
risks.
Requirement to have independent directors
2.34 Section 86 establishes the governance provisions that require all
RSE licensees with a corporate structure to have a minimum of one-third
independent directors and an independent Chair.
2.35 RSE licensees that adopt a corporate structure must have at least
one-third independent directors and an independent Chair. [Schedule 1,
item 1, paragraphs 86(1)(a) and (b)]
2.36 The requirement to have an independent Chair for RSE licensees
that have a corporate structure, reflects the role that a Chair has in the
establishing the direction and oversight of the decision making process of
a board.
2.37 When satisfying the one-third independent requirement, the
independent Chair is considered to be one of the independent directors.
[Schedule 1, item 1, subsection 86(2)]
Example 2.1
An RSE licensee has a nine person board. The Chair and two other
directors meet the definition of independent under section 87. This will
satisfy the new requirements under section 86 because one-third of the
directors, including the Chair, are independent.
2.38 The transitional arrangements clarify that an RSE licensee has
until the end of the transition period to achieve full compliance with all
16
RSE licensees
the new requirements, including deciding which of the independent
directors is to be appointed as Chair. [Schedule 1, items 23 to 25]
2.39 This will allow time for any new independent directors
appointed to the RSE licensee board to become sufficiently experienced
before potentially having to take on the role of Chair.
2.40 When making appointments to meet the requirement to have a
minimum of one-third independent directors, RSE licensees must comply
with APRA's prudential standards relating to the appointment and
removal of independent directors. [Schedule 1, item 1, paragraph 86(1)(c)]
2.41 In the small number of cases where the RSE licensee does not
have a corporate structure, but comprises a group of individual trustees, at
least one-third of those trustees must be independent. [Schedule 1, item 1,
paragraph 86(3)(a)]
2.42 Where the RSE licensee comprises individual trustees, and those
trustees customarily appoint a nominal Chair, they will not be required to
have an independent Chair.
2.43 RSE licensees that are groups of individual trustees must
comply with APRA's prudential standards relating to the appointment and
removal of independent trustees. [Schedule 1, item 1, paragraph 86(3)(b)]
Definition of independent
2.44 Section 87 sets out the definition of independent for the purpose
of satisfying the one-third independent director requirement. The
definition provides that a person is independent from an RSE licensee
unless certain conditions are present.
2.45 Section 87 provides two sets of conditions that, if present, would
result in a person not being considered to be independent.
• The first set relates to ownership (or structural) arrangements
relating to the RSE licensee.
• The second set relates to relationships an RSE licensee might
have.
2.46 Section 87 also allows APRA, under sections 88 and 90, to take
into consideration whether or not a person has the ability to exercise
independent judgement in performing the role of a director of an RSE
licensee. [Schedule 1, item 1, subsection 87(4)]
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
2.47 To ensure flexibility to address future developments in the
superannuation industry, regulations may be made to specify
circumstances that would result in a person being either independent or
not independent. [Schedule 1, item 1, paragraph 87(1)(g)]
2.48 The definition of independent replaces the existing definition of
an independent director in section 10 to ensure a broader range of
circumstances are taken into account when considering a person's ability
to exercise independent judgement.
2.49 In particular, the current definition of 'independent director' in
the SIS Act is narrowly cast within the current equal representation
framework, and is designed to achieve independence from stakeholders
(that is, employers, members and their representative organisations);
whereas the new definition covers ownership (or structural) arrangements
relating to the RSE licensee as well as the relationships an RSE licensee
might have. Under the revised definition, a person's independence is not
affected by that person's membership of the fund.
Ownership arrangements that prevent independence
2.50 A person cannot be considered to be an independent director of
an RSE licensee if they hold an interest of 5 per cent or more of the share
capital of the RSE licensee or another body corporate that is related to the
RSE licensee. [Schedule 1, item 1, paragraphs 87(1)(a) and (b)]
2.51 For the purposes of new Part 9, the question of whether bodies
corporate are related to each other is to be determined in the same way as
that question would be determined under the Corporations Act 2001
(Corporations Act).
2.52 An exception is provided for a director who holds a
shareholding interest that does not confer a right to profit or give rise to
the expectation of a profit, if that director holds the interest as a result of
holding office as a director of the RSE licensee. [Schedule 1, item 1,
subsection 87(2)]
Example 2.2
A director on the board of XYZ Super was asked to hold a parcel of
shares (which constituted more than a five per cent holding) in the
super fund's RSE licensee for the period of his/her directorship. The
parcel of shares was held by the director by virtue of his/her office and
did not create or impose any right for the director to profit in any way.
As such, the nominal holding will not be in itself taken to compromise
the director's ability to be considered to be independent.
18
RSE licensees
2.53 A person will not be considered independent if they are, or they
have been in the preceding three years, an executive officer or employee
of the RSE licensee. Similarly a person will not be considered to be
independent if they are currently, or in the previous three years, have been
a director or executive officer of a related body corporate of the RSE
licensee. [Schedule 1, item 1, paragraph 87(1)(c)]
Example 2.3
Two years ago, a person was Chief Executive Officer of a life
company operating in the same financial conglomerate group as the
RSE licensee. As the RSE licensee and the life company are related
bodies corporate, this person cannot sit on the RSE licensee board as
an independent director until a further year lapses since the person
served as CEO of the life company (as this role is that of an executive
officer of a related body corporate of the RSE licensee).
Relationships that prevent independence
2.54 Where there is a business relationship between the RSE licensee
and a person in their capacity as an employer, a director or executive
officer of a corporate entity, that person will not be independent if the
corporate entity has, or has had in the preceding three years, a business
relationship that was material to either the RSE licensee or the other
person. An employee of such a corporate entity will also not be
independent if they are currently, or were in the preceding three years,
involved in the business relationship that was material. [Schedule 1, item 1,
paragraph 87(1)(e)]
2.55 An individual person (for example, in the capacity as a sole
trader) will not be independent if they have, or had in the preceding three
years, a business relationship with the RSE licensee or any of the trustees
within a RSE licensee that comprises individual trustees, which is
considered to be material to either the RSE licensee or the person.
[Schedule 1, item 1, paragraph 87(1)(d)]
2.56 When determining circumstances that may be considered to be
material, the RSE licensee would be expected to consider the effect on the
other person if the business relationship was to cease; for example, if they
would lose a significant portion of their revenue. APRA's prudential
standards are expected to set out requirements for RSE licensees in this
respect.
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
Example 2.4
Bubbles Stationery Ltd provides office equipment to the RSE licensee
of LW&J Super. The value of these goods to the RSE licensee is
insignificant, amounting to less than 0.01 per cent of its operations.
However, provision of office equipment represents 35 per cent of the
annual turnover of Bubbles Stationery.
Given the business relationship between Bubbles Stationery Ltd and
the RSE licensee would be considered to be material to Bubbles
Stationery Ltd, none of the Bubbles Stationery Ltd's directors or
executive officers would be considered to be independent if they were
appointed to LW&J Super Fund's board.
2.57 In addition, APRA's outsourcing prudential framework
(currently reflected in Prudential Standard SPS 231 Outsourcing and
Prudential Practice Guide SPG 231 Outsourcing) includes a concept of
materiality in the context of the business activities of the RSE licensee.
Given that RSE licensees have been required to give consideration to
questions of materiality for an extended period of time under the current
prudential framework and the previous operating standard, RSE licensees
should have a working knowledge of the concept of materiality in this
context already.
2.58 Whether a business relationship is material or not will depend on
the circumstances of each case. However, the types of business activities
that the RSE licensee may consider form the basis of a material
relationship include administration, investment management functions
under a formal agreement, internal audit, insurance, business continuity
planning arrangements and arrangements with financial planners,
particularly where the advice relates only to a member's interest in the
RSE.
Example 2.5
Where an actuary is retained to provide advice on a single, specific
funding issue in relation to defined benefit members within an RSE
licensee's business operations, it would be open to an RSE licensee to
consider this relationship to not be a material business relationship
because the engagement is for a limited time and a limited scope (in
terms of the issue and in terms of the overall impact on the fund).
Example 2.6
The administrator of the RSE licensee would generally be considered a
material service provider because administration is core to the
operations of the RSE licensee. Another example is an
externally-provided internal audit function.
20
RSE licensees
2.59 This Schedule also provides that a person will not be
independent in the following specific situations if they are, or have been
in the preceding three years, a director or executive officer of a large
employer-sponsor within the meaning of section 29TB or any organisation
that has the right to appoint or nominate for appointment, directors or
trustees of the RSE licensee. [Schedule 1, item 1, paragraph 87(1)(f)]
2.60 This exclusion is designed to ensure that an independent director
is not closely aligned with any of the sponsoring parties who have rights
to nominate or appoint directors of the RSE licensee.
2.61 To ensure flexibility to address future developments in the
superannuation industry, this Schedule provides for regulations to be
made that could specify other circumstances that would result in a person
not being independent. [Schedule 1, item 1, paragraph 87(1)(g)]
2.62 A regulation making power has also been included to determine
circumstances in which a person is considered independent regardless of
the circumstances in subsection 87(1). This provision has been included to
address possible structures or relationships that may emerge in the
superannuation industry and may mean a person could be considered
independent even though they might otherwise be captured by
subsection 87(1). Having a regulation making power will enable the
Government to provide certainty to the industry without having to amend
the SIS Act. [Schedule 1, item 1, subsection 87(3)]
2.63 This will ensure that APRA is only required to exercise its
power in individual, exceptional or urgent circumstances rather than in
more common scenarios which may impact on a wider number of
participants.
APRA determinations
Determination as to whether a person is independent
2.64 To support the Government's proposed reforms, this Schedule
provides APRA with the power to make determinations as to whether a
person is independent or not independent of an RSE licensee. [Schedule 1,
item 1, subsection 87(4)]
2.65 This is intended to allow APRA to respond to situations where a
person's circumstances and their capacity to exercise independent
judgement is clear but for reasons such as timing, restructures and mergers
and acquisitions.
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
Example 2.7
A person may not be considered independent under section 87, because
they only ceased being employed by the RSE licensee 2 years and 11
months ago (that is, not the full three year period required by
section 87 to make a former employee independent). An RSE licensee
can apply to APRA under section 89 to make a determination that such
a person is independent. In this situation if APRA is of the view the
person's capacity to exercise independent judgement is clear, but for
that person's lack of separation from the RSE licensee for the full three
years, APRA may, under section 88, make a determination that the
person is independent.
2.66 An RSE licensee can apply to APRA under section 89 to make a
determination that a person is independent. Where APRA is reasonably
satisfied that the person is likely to be able to exercise independent
judgement in performing the role of director (or individual trustee) they
will determine the person is independent. [Schedule 1, item 1, subsection 88(1)]
2.67 One situation where this power might be used is where a
person's circumstances mean that they do not meet the independence
requirements, but that they are considered to be capable of exercising
independent judgement.
Example 2.8
A director on an RSE licensee board is also a director on the board of
another company operating within the same financial conglomerate
group.
As these two RSE licensees are related bodies corporate under
subparagraph 87(1)(c)(ii), the director cannot sit on the board of the
RSE licensee as an independent director.
The RSE licensee could apply to APRA under section 89 for a
determination under section 88 that the director is capable of
exercising independent judgement in these circumstances. The RSE
licensee could seek a determination from APRA on the grounds that
the other company is so removed from the RSE licensee that no
unmanageable conflicts arise for the director.
Example 2.9
An RSE licensee forms the view that a person could be considered
independent on the RSE licensee board, despite section 87, where this
person is a director or executive of an employer sponsor that has 510
employee members in the fund and the fund as a whole has 500,000
members.
22
RSE licensees
A decision by the employer sponsor to change funds would not have a
significant impact on the overall number of members in the fund as
employee members of the fund represent 0.1 per cent of overall fund
membership.
2.68 APRA through section 90 can also make a determination that a
person is not independent where they are reasonably satisfied that the
person is unlikely to be able to exercise independent judgement in the
role.
2.69 One situation where this power might be used is where a director
appears to meet the independence requirements but APRA forms the view
that, on the basis of relevant information, there are circumstances in
relation to the director, such as the presence of a family or other personal
relationship with a person, which may limit their ability to exercise the
necessary independent judgement.
2.70 Determinations under sections 88 and 90 are reviewable
decisions. This means that a person affected by such a decision can
request APRA to reconsider the decision as well as seek review by the
Administrative Appeals Tribunal under section 344. [Schedule 1, item 6,
subsection 10(1)]
2.71 To ensure that the policy intent of Part 9 is reflected in APRA's
determination of whether a person is independent, APRA must take into
consideration the extent to which the circumstances relating to a person's
independence in paragraphs 87(1)(a) to (g) and subsection 87(3) do not
apply to the person. [Schedule 1, item 1, subsection 88(2)]
Example 2.10
It is unlikely that an RSE licensee would be able to form a view that a
person is independent where that person is a partner in the audit firm
that currently undertakes the external audit for the RSE licensee's
business operations, even if they are not directly involved in the audit
itself.
2.72 APRA is required to give written notice of any such
determinations, or, if it refuses an application, of the reasons for refusing
the application. [Schedule 1, item 1, subsection 88(3)]
2.73 Any such determination will take effect on the day it is made,
and ceases to have effect if APRA makes a determination under new
section 90 that the person is not independent. [Schedule 1, item 1,
subsection 88(4)]
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
Application for a determination under section 89
2.74 Section 89 provides RSE licensees with the ability to apply to
APRA for a determination that a particular person is independent for the
purpose of complying with Part 9. [Schedule 1, item 1, section 89(1)]
2.75 When APRA receives an application for a determination, it may
give the RSE licensee notice requesting further information required to
make the determination. [Schedule 1, item 1, subsection 89(2)]
2.76 APRA must make its determination within 60 days, extendable
by a further period of 60 days, provided APRA informs the RSE licensee
and the extension is made within the initial 60 day period. [Schedule
1, item 1, paragraph 89(3)(a), subsections 89(4) and (5)]
2.77 APRA may request additional information in writing from the
RSE licensee. In that case, the initial 60 day period only starts when
APRA receives the information requested. [Schedule 1, item 1, subsection 89(2)
and paragraph 89(3)(b)]
2.78 A failure by APRA to make a decision that a person is
independent is equivalent to a refusal of the application. [Schedule 1, item 1,
subsection 89(6)]
2.79 The provisions in subsection 89(6) are similar to APRA's
powers in the context of RSE licensing and the authorisation of MySuper
products. APRA is expected to be in regular contact with the affected
entity where it is unable to make a determination within the required time.
APRA's experience is that it is highly unusual for applications under these
other provisions in the SIS Act not to be dealt with within the time period
for dealing with applications. If the circumstance arises where the time
period expires, the affected entity will not be prevented from reapplying.
Determination as to whether a person is not independent
2.80 APRA may determine that a person is not independent if it is
reasonably satisfied that the person is unlikely to be able to exercise
independent judgement in performing the role of director (or individual
trustee). [Schedule 1, item 1, subsection 90(1)]
2.81 To ensure that the policy intent of Part 9 is reflected in APRA's
determination of whether a person is unlikely to be able to exercise
independent judgement, APRA must take into consideration the extent to
which the circumstances relating to a person's independence in
paragraphs 87(1)(a) to (g) and subsection 87(3) do not apply to the person.
That is, APRA must take account of the criteria that would prevent a
person from being considered independent in making this determination.
[Schedule 1, item 1, subsection 90(2)]
24
RSE licensees
2.82 APRA has indicated that it envisages using this power rarely.
This is because the definition of independent in subsection 87(1) is
expected to provide the superannuation industry with sufficient certainty
when deciding whether a person is eligible to be appointed as an
independent director on an RSE licensee's board. Further, RSE licensees
will be encouraged to consult with APRA where there is any doubt about
the independence of a potential director. This consultation can be
undertaken formally by RSE licensees under section 89.
2.83 APRA may specify in a determination that the person is not
considered to be independent for a particular period. In such a case, the
determination of non-independence ceases when the period ends or when
a determination under section 88 is made that the person is independent
for the purpose of Part 9. [Schedule 1, item 1, subsections 90(3) and (6)]
2.84 In making a determination, APRA must give the RSE licensee
written notice including the reasons for making the determination.
[Schedule 1, item 1, subsection 90(5)]
2.85 A determination made in relation to whether a person is not
independent takes effect on the day the determination is made. [Schedule 1,
item 1, subsection 90(4)]
2.86 If the determination from APRA is made for a fixed period
under new subsection 90(3), the expiry of that period does not on its own
result in the person becoming independent. [Schedule 1, item 1,
subsection 90(7)]
Replacing independent directors
2.87 In case of a vacancy, section 91 provides RSE licensees with
120 days to replace an independent director. [Schedule 1, item 1, section 91]
2.88 The provision deems an RSE licensee to be in compliance with
the requirement to have one-third independent directors if there is a
vacancy, as long as the RSE licensee was complying with the
requirements immediately before the vacancy arose and is in compliance
with the requirements as soon as the vacancy is filled.
2.89 This also covers situations where there are multiple vacancies.
At the time of the first vacancy, section 91 would deem an RSE licensee
to be in compliance with the requirement to have one-third independent
directors for 120 days. If a second vacancy arises within the 120 days
before the vacancy is filled, the RSE licensee still meets the requirements
under section 91 because it will be deemed to have complied with the
requirements immediately before the second vacancy arose (as long as
that first vacancy is ultimately filled within 120 days).
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
Example 2.11
Adam and Bev are both independent directors of an RSE licensee that
is a corporate trustee.
The RSE licensee complies with section 86. From 1 March, Adam is
no longer a director and the RSE licensee has 120 days to replace him.
During this time the RSE licensee is considered to be complying.
From 1 May, Bev is no longer a director and the RSE licensee has
120 days to replace her. The fact that the RSE licensee has two
vacancies for independent directors does not cause it to fail to comply
with section 86, provided it complies with section 86 immediately after
each of the vacancies is filled. That is, it must replace Adam with a
new independent director by 28 June, and Bev with a new independent
director by 28 August, in order to remain in compliance with
section 86.
Acting trustees
2.90 Part 9 does not apply in circumstances where an acting trustee
has been appointed under Part 17. [Schedule 1, item 1, section 93]
2.91 At times, pursuant to section 134, it is necessary for APRA to
appoint an acting trustee to a superannuation entity; for example, where
the trustee of the entity is either suspended or removed. Subject to the
conditions of appointment, the role of the acting trustee is to exercise the
functions and duties of a trustee in relation to the superannuation entity
until such time as a permanent trustee takes over control of the entity or
the entity itself is wound up.
2.92 It is appropriate that the new governance requirements do not
apply to acting trustees. This is because acting trustees are seen as an
interim measure and are not intended to act in a permanent trustee
capacity.
Facilitating compliance with the new governance arrangements
2.93 The requirements set out in Part 9 for independent directors
override any contradictory provisions in trust deeds and other rules
governing a regulated superannuation fund, including the constitution of a
corporate trustee or any other documentation that imposes requirements
on the RSE licensee relating to the appointment of directors or trustees.
[Schedule 1, item 1, section 94]
26
RSE licensees
2.94 It is anticipated that most RSE licensees will amend their trust
deeds or constitutions to insert provisions to enable them to comply with
the requirements for independent directors before the three year transition
period concludes.
2.95 As section 94 will only become operative three years after the
Bill receives Royal Assent, it will not be available to RSE licensees
during the transition period. However, a similar provision has been
provided in the transitional provisions that will be applicable during the
three year transition period. [Schedule 1, item 25]
Consequences of not complying with the new governance arrangements
2.96 A contravention of the new governance arrangements under
Part 9 will not invalidate a transaction. [Schedule 1, item 1, subsection 92(1)]
2.97 However, the contravention may result in a fund being directed
not to accept any contributions made to the fund by an employer sponsor
under section 63. [Schedule 1, item 1, subsection 92(2)]
Consequential amendments
2.98 The entry in the table in section 4 is updated to reflect its new
contents relating to governance arrangements for regulated
superannuation funds. [Schedule 1, item 2, section 4]
2.99 The definitions of employer representative, independent
director, independent trustee, member representative and policy
committee are repealed as they relate to the equal representation regime
that is being repealed. A new definition of independent, and a new
definition for shareholding interest are inserted. [Schedule 1, items 3 to 5
and 7, definitions of 'employer representative', 'independent' 'independent director',
'independent trustee', 'member representative', 'policy committee' and 'shareholding
interest' in subsection 10(1)]
2.100 The definition of reviewable decision is amended to include a
decision by APRA to refuse to make a determination under section 88 that
a person is independent, and a decision under section 90 that a person is
not independent are placing. They replace decisions made under the
former equal representation regime that are being repealed [Schedule 1,
item 6, paragraphs (m) and (n) of the definition of 'reviewable decision' in
subsection 10(1)]
2.101 Subsection 10(2) is repealed. This subsection relates to the
definition of independent director in the context of the equal
representation rules. [Schedule 1, item 8, subsection 10(2)]
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
2.102 The notes in section 29C are amended to refer to the new
requirements in Part 9 to have at least one-third independent directors and
trustees. [Schedule 1, item 9 and 10, subsections 29C(6) and 29C(7)]
2.103 Subsection 29EA(4) is repealed as it refers to section 92 that is
being repealed. This subsection clarifies that APRA may, under
subsection 29EA(1), impose a licence condition on a fund to comply, or
class of funds, specified in the condition must comply with the alternative
agreed representation rules whenever section 92 applies to the fund.
[Schedule 1, item 11, subsection 29EA(4)]
2.104 Subsection 63(6) dealing with contraventions of Part 9 is
amended to take account of the new regime in that Part. The heading and
the contents of the subsection now refer to the new independence
requirements imposed on trustees and directors, and not to equal
representation rules. [Schedule 1, items 12 and 13, subsection 63(6)]
2.105 Subsections 63(7B), (7C) and (7D) dealing with breaches of the
former equal representation rules are repealed. Additionally, subsection
63(8) is amended to remove the reference to subsection 63(7B). The
paragraph stating subsections 63(7B), (7C) and (7D) are modifiable
provisions is also repealed. [Schedule 1, items 14, 15 and 21, subsections 63(7B) to
(8) and paragraph (d) of the definition of 'modifiable provision' in subsection 327(1)]
2.106 Sections 107 and 108 are repealed as the provisions relate to the
equal representation rules. Section 107 section applies duties to the
trustees of employer sponsored funds to establish procedures for
appointing member representatives when those trustees are required by
law to have member representatives. Subsection 108(1) provides that,
where a standard employer sponsored fund relies on subsection 89(2) to
comply with the equal representation provisions, then the additional duties
in subsection 108(2) apply to trustees of the fund. Subsections 108(3) and
(4) are the attached offence provisions. [Schedule 1, item 16, sections 107
and 108]
2.107 Section 117 sets out circumstances in which amounts may be
paid out of an employer-sponsored fund to an employer-sponsor. A
number of changes are required to reflect the removal of the equal
representation rules in Part 9.
2.108 Subparagraphs 117(5)(b)(i) and 117(5)(b)(ii) are repealed and
replaced by new subparagraphs that reflect the changed requirements for
composition of boards. The existing subparagraphs required that a
resolution must be passed by equal numbers of employer and member
representatives on boards of trustees or among groups of individual
trustees. Subsection 117(9) is repealed as it makes provision for situations
where additional independent trustees or directors have been appointed to
28
RSE licensees
equal representation trustee groups or boards. [Schedule 1, items 17 and 18,
subparagraphs 117(5)(b)(i) and (ii), and subsection 117(9)]
2.109 Paragraphs 223A(1)(f) and (g) relating to breaches of repealed
sections 107 and 108 are repealed. [Schedule 1, item 19, paragraphs 223A(1)(f)
and (g)]
2.110 The paragraphs incorporating an absence of a quorum at a
meeting of members of a policy committee into the definition of
procedural irregularity, relating to provisions under former Part 9 that are
being repealed by this Schedule, are repealed [Schedule 1, item 20,
subparagraph )(a)(iv) of the definition of 'procedural irregularity' in subsection 321(1)]
2.111 Subsection 327(1) is amended to include the transitional
provisions as modifiable provisions. [Schedule 1, item 22, paragraph (i) of the
definition of 'modifiable provision' in subsection 327(1)]
Application and transitional provisions
2.112 APRA will be making prudential standards to prescribe
transition arrangements to ensure compliance with Part 9 before the end
2020. During the transition period, RSE licensees will need to comply
with these prudential standards.
2.113 The transition period is for three years starting on the day after
the Bill receives the Royal Assent. [Schedule 1, item 23]
2.114 Where an RSE licensee complies with the transitional
requirements during the transition period neither the new governance
provisions in Part 9 nor the current provisions in Part 9 will apply during
this period. [Schedule 1, item 24]
2.115 During the transition period, the transitional prudential standards
override any contradictory provisions in trust deeds and other rules
governing a regulated superannuation fund, including the constitution of a
corporate trustee. [Schedule 1, item 25]
2.116 This is required during the transition period to allow RSE
licensees time to amend their trust deeds or constitutions because section
93B will not take effect until the end of the transition period.
2.117 In addition, APRA will have the power to modify these
transitional provisions to ensure that they do not have any unintended
effects, or to provide relief to RSE licensees as required. The transitional
rules are modifiable provisions which can be amended by APRA.
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011
RSE licensees
2.118 This Schedule is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3
of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview
2.119 Schedule 1 to this Bill amends the SIS Act to introduce
minimum independence requirements for RSE licensees. RSE licensees
that have a board of trustees must have at least one-third independent
directors and the Chair of the Board is to be an independent director. RSE
licensees that are a group of individual trustees must have at least
one-third of the trustees that are independent.
Human rights implications
2.120 This Schedule does not engage any of the applicable rights or
freedoms.
Conclusion
2.121 This Schedule is compatible with human rights as it does not
raise any human rights issues.
30
Chapter 3
Regulation impact statement --
RSE licensees
Background
3.1 The size of the superannuation savings pool in Australia is
currently $2.3 trillion1 and is expected to grow to approximately
$9 trillion by 2040.2 While compulsory superannuation has been in
existence since 1992, its significance in Australia's financial system has
increased rapidly in recent years as the pool of savings continues to grow
and questions about its efficiency are raised in broader economic
discussions.
3.2 The APRA has prudential oversight of the superannuation
system along with the Australian Securities and Investments Commission
(ASIC) which regulates the conduct and disclosure obligations of
financial services providers (including superannuation trustees that hold
an Australian financial services licence). The Australian Taxation Office
has responsibility for the oversight of SMSFs.
3.3 In its superannuation statistical data, APRA groups
superannuation funds into several categories: corporate (38 funds), retail
(147 funds), public sector (19 funds), industry (not-for-profit) (44 funds)
and small (550,706 funds).3 Superannuation funds are generally regulated
by both the SIS Act and the Corporations Act (and related regulations,
along with APRA prudential standards).4
3.4 In 2009, a review was commissioned to examine and analyse the
governance, efficiency, structure and operation of Australia's
superannuation system, which was led by Jeremy Cooper (the Cooper
Review). It specifically examined both compulsory and voluntary aspects
of superannuation and the governance, efficiency, structure and operation
of the system. The Cooper Review was aimed at boosting the retirement
1
APRA Quarterly Superannuation Performance June 2017.
2 The Financial System Inquiry, pages 2-84 July 2014.
3 Small funds include self-managed superannuation funds. APRA Quarterly Superannuation
Performance March 2015.
4
The Australian Taxation Office also plays a role in the administration of self-managed
superannuation funds.
31
Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
savings of all Australians by increasing efficiencies, reducing costs and
fees and in turn lifting long-term rates of return.
3.5 The Cooper Review recommended that the SIS Act be amended
so that it is no longer mandatory for trustee boards to maintain equal
representation in selecting its directors. The Cooper Review also noted
that the presence of independent directors on boards is best practice in
corporate governance.5
3.6 In September 2013, the then Opposition committed to improve
governance in superannuation through the appropriate provision of
independent directors on superannuation trustee boards.6
3.7 In 2014, the FSI in its Final Report recommended mandating a
majority of independent directors on the board of corporate trustees of
public offer superannuation funds, including an independent chair.
3.8 The FSI noted that 'including independent directors on boards is
consistent with international best practice' and that independent directors
'improve decision making by bringing an objective perspective to issues'
and 'hold other directors accountable for their conduct'.
The problem
3.9 The Government is seeking to deliver on its superannuation
governance election commitment (election commitment) to align
governance in superannuation more closely with the corporate governance
principles applicable to ASX listed companies. In particular, the
Government is seeking to increase the level of independence in
superannuation funds to ensure improved member outcomes, while
minimising the costs to the superannuation industry.
3.10 The Cooper Review and the FSI into the Financial System both
concluded after their consultations with the superannuation industry
representatives that superannuation funds would benefit from having
independent directors. In particular, the FSI identified overseas research,
which suggested, 'good governance adds one percentage point to pension
fund returns'.7 The superannuation industry representatives have also
indicated that stronger board performance, which could be achieved
5
Cooper Review, page 55.
6 In general terms, governance refers to the system of rules, practices and processes by which
a company is directed and controlled.
7 Financial System Inquiry Final Report, Chapter Two; Governance of Superannuation Funds.
32
Regulation impact statement -- RSE licensees
through increased independence, can have a direct impact on the returns
superannuation funds achieve for their members.
3.11 Currently, it is estimated that of only 49 per cent of industry,
corporate and public sector funds have one or more independent directors
(leaving 51 per cent of funds without any independent directors).
Considering the current average board size of these particular funds is
estimated to be nine members it can be concluded that independence is
lacking across these superannuation funds.
3.12 In a 2015 report by Australian Institute of Company Directors,
which considered the views of 100 Chairs covering organisations in the
publicly listed, private, not-for-profit and public sectors, consideration
was given to the factors that were required for good governance. The
report indicated that the past focus on structural aspects of governance has
not helped reduce the occurrence of corporate errors, omissions and
malfeasance. Instead it was considered that the critical factors required for
ensuring good governance were trust; independence of mind; and
diversity of worldview.
3.13 In this regard, independence of mind and responsibility are at the
core of the case for independence. Current APRA guidance references a
number of key principles underpinning a sound and effective governance
framework for superannuation boards one of which is 'responsibility --
the board of directors is ultimately responsible and accountable for the
decisions and actions taken by a registrable superannuation entity (RSE)
licensee'.
3.14 Included among the SIS Act covenants, which are required to be
included in the governing rules of superannuation trustees, are covenants
to:
• perform the trustee's duties and exercise the trustee's powers
in the best interests of the members;
• exercise the same degree of care, skill and diligence as a
prudent superannuation trustee (or prudent superannuation
entity director) would exercise in relation to an entity of
which it is the trustee and on behalf of the members;
• act fairly in dealing with classes (or members in a class) of
members; and
• act honestly in all matters concerning the entity.
3.15 These covenants are aimed at ensuring superannuation boards
and directors act responsibly.
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
3.16 Historically, superannuation boards have generally acted in the
best interests of their members in line with the above covenants,
irrespective of whether they have one or more independent directors.
However, this is not always the case. In this regard, in 2009, Trio Capital
collapsed, leaving around 6,100 investors with losses amounting to $176
million. The majority of the loss was due to the failure to not fully
investigate the accuracy of falsified valuations and fictitious returns in
overseas hedge funds, as well as failure to adequately investigate the risks
associated with the investment. APRA reviewed governance failings
within Trio Capital, and identified a lack of independent directors in the
Trio Capital funds, which were APRA regulated superannuation funds.
3.17 The liquidator of the failed Trio Capital entities concluded that
the directors did not take reasonable steps to ensure that Trio was
complying with its obligations as responsible entity, did not exercise
appropriate duty of care as officers, did not act in the best interests of the
managed investment scheme into which the Trio Capital superannuation
funds had invested, and did not comply with statutory and fiduciary
responsibilities to avoid conflicts of interest.
3.18 It is also important to note that APRA has on occasion
disqualified directors under section 120A(2) of the SIS Act. Some of the
decisions to disqualify directors have been made because APRA formed
the view that the director failed to exercise a reasonable degree of care
and diligence in ensuring that RSE licensee carried out its duties under the
SIS Act.
3.19 On 25 August 2015, in an Australian Financial Review article
the link between improved independence and improved decision making
through the context of the FSI was clearly captured.
Financial system inquiry head David Murray said independent
directors were 'more likely to ask the right questions' if a board
needed to pit hard-nosed economic decisions against ideology ...
funds should have a majority of independent directors and an
independent chair. 'The point about independent directors is that
they can examine in a dispassionate way if policies are in the
interests of members or for other reasons,' ... 'That is very
helpful. Independent directors are more likely to ask the right
questions of where the interests of members lie, if there are
enough of them.'8
8
Australian Financial Review, Australia, Joanna Mather and Sally Patten, 25 August 2015.
34
Regulation impact statement -- RSE licensees
3.20 Increasing independence can also be seen to bring diversity in
worldview to a board's decision making processes. A diverse worldview
enables the decision making processes of superannuation boards to be
tested and challenged in a way that achieves beneficial member outcomes
and feeds back into the above covenants.
3.21 However, the current equal representation model, which has
existed since 1993, significantly affects the current the level of
independence of mind and diversity of worldview obtained through the
inclusion of definition of an independent director as currently defined in
section 10 of the SIS Act.
3.22 Section 10 provides that an 'independent director' in relation to
a corporate trustee of a fund, means a director of the corporate trustee
who:
• is not a member of the fund;
• is neither an employer-sponsor of the fund nor an associate of
such an employer-sponsor;
• is neither an employee of an employer-sponsor of the fund
nor an employee of an associate of such an
employer-sponsor;
• is not, in any capacity, a representative of a trade union, or
other organisation, representing the interests of one or more
members of the fund; and
• is not, in any capacity, a representative of an organisation
representing the interests of one or more employer-sponsors
of the fund.
3.23 Equal representation as currently contained in the SIS Act
prevents changes to the number of independent directors on some
superannuation trustee boards.9 Under the SIS Act, funds operating under
the equal representation model are only able to appoint one independent
director. In practice however, funds have the ability to apply to APRA to
appoint more than one independent director.10 Not-for-profit funds and
9
At June 2013, 68 per cent (103 of 151) of registrable superannuation entity (RSE) licensees
had an equal representation board structure.
10
For example, the Industry Super Australia submission noted that out of a sample of 26
industry superannuation funds, 16 of the funds already have at least one independent
director on their board. Of these, the majority of funds (11) had one independent director
and the remaining five more than one independent director.
35
Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
corporate funds typically operate under equal representation
arrangements, although some have an independent director on the Board.
3.24 In contrast to directors representing employers or employees
under the equal representation model independent directors are free of the
types of conflicts that may cause them to deliberately or unconsciously
serve the interests of a related party or a subset of members, rather than
the fund's entire membership.
• Independent directors of superannuation funds are not
influenced by:
- parent companies, such as an insurance company or
bank;
- sponsoring organisations, such as a union or employer
organisation;
- service providers, such as an administrator; or
- subsets of the membership of the fund, such as those
fund members who are also a member of the sponsoring
union.
3.25 The FSI also indicated that the equal representation model is less
relevant in the current superannuation system, which predominantly
consists of public offer accumulation funds and funds less focused on
single employers.
... fund members exercise choice, directors appointed by
employer and employee groups are less likely to represent the
broader membership of public offer funds (see Recommendation
12: Choice of fund). Given the diversity of fund membership, it is
more important for directors to be independent, skilled and
accountable than representative.
3.26 Given the importance of independence of mind and diversity of
worldview as expressed by Chairs, under the SIS Act and eminent
academics, increasing independence is key to improving governance in
the superannuation system, thus improving member outcomes.
The situation the Government's election commitment is addressing
3.27 Superannuation funds regulated by APRA are structured with
trustee arrangements -- there is a separation between members and
trustees, with trustees managing funds on behalf of members.
36
Regulation impact statement -- RSE licensees
3.28 A longstanding feature of the superannuation governance
framework is the requirement for some superannuation trustee boards to
have equal representation (typically not-for-profit and corporate funds).11
This reflects the position adopted with the commencement of occupational
superannuation, that members should have a greater voice through
representation on non-public offer funds (industry, corporate and public
sector). Equal representation allowed both stakeholder groups (employers
and employees) to have oversight and responsibility for funds' operations.
3.29 Most APRA-regulated funds are public offer funds, which also
receive contributions from standard employer sponsors; that is, some
members may choose to join the fund by direct arrangement with the
trustee, while others join because of an arrangement between their
employer and the trustee. In those cases, there may be an independent
trustee, but for certain groups of members drawn from a single employer,
the trustee must have in place advisory policy committees that must
comprise equal representation of the both the employer sponsor and that
group of members. Policy committees are not required in cases where the
trustee board has equal representation.
3.30 The Cooper Review examined the equal representation model
and found that although it was an important part of the governance
structure twenty years ago, 'changes in the industry over time and certain
implementation practices mean that equal representation no longer seems
to achieve its original ... objective'.12 In addition, the Cooper Review
articulated the issues with governance in superannuation in these terms:
Trustee governance structures have not kept up with
developments in the industry. There have also been difficulties
for trustees and their trustee-directors in understanding what is
expected of them and, as the industry consolidates, conflicts of
interest and conflicts of duty arise regularly. Good trustee
governance is fundamental to enhancing members' retirement
incomes.13
11
Not-for-profit funds include industry, corporate and public sector funds. These funds are
generally affiliated with either the public sector, individual corporations, trade unions or
employer representatives and have an equal number of employer and employee
representatives on a trustee board. Retail funds are generally run for profit and are affiliated
with banks or other financial institutions. Retail funds have significantly more choice
investment options than non-retail funds. In general terms, equal representation means that
the board of a corporate trustee must consist of equal numbers of employer representatives
and member representatives.
12
Cooper Review, page 53.
13
Cooper Review, page 43.
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
3.31 The Cooper Review recommended that the SIS Act be amended
so that it is no longer mandatory for trustee boards to maintain equal
representation in selecting its directors. The Cooper Review also noted
that the presence of independent directors on boards is best practice in
corporate governance.14
3.32 In 2014, the FSI, in its Final Report, recommended mandating a
majority of independent directors on the board of corporate trustees of
public offer superannuation funds, including an independent chair. The
FSI noted that 'including independent directors on boards is consistent
with international best practice' and that independent directors 'improve
decision making by bringing an objective perspective to issues' and 'hold
other directors accountable for their conduct'.15
3.33 In addition, there is currently an inconsistency in the governance
frameworks (including self-governing guidelines) on the number of
independent directors and the definitions of independence between retail
and not-for-profit superannuation fund boards.
3.34 For example, FSC member entities (retail funds) have no
restrictions in appointing independent directors and from 1 July 2014, are
required, under FSC's self-governing standard, to have a majority of
independent directors and an independent chair.
The case for Government action
3.35 Given superannuation funds are expected to increase in
significance and size, Australia's superannuation governance framework
must be strengthened to ensure a stable and efficient system that improves
the wellbeing of all Australians.
3.36 In this regard, strong governance arrangements ensure that fund
members' interests are paramount in the minds of trustees. The trustee
(and its directors) has fiduciary obligations to members and beneficiaries,
which require taking ultimate responsibility for the fund and an obligation
to manage the assets of the fund with competence, diligence, prudence
and honesty.
3.37 In September 2013, the then Opposition published The
Coalition's Policy for Superannuation in which it committed to improving
standards and better management of conflicts of interest by aligning
14
Cooper Review, page 55.
15
Financial System Inquiry, page 134 of the Final Report, November 2014.
38
Regulation impact statement -- RSE licensees
corporate governance in superannuation more closely with the corporate
governance principles applicable to ASX listed companies. The Coalition
committed to improving superannuation governance by ensuring that there
is an appropriate provision for independent directors on superannuation
fund boards. The Coalition also noted that the Cooper Review questioned
the financial expertise and professionalism of union and employer trustees
appointed to superannuation boards through the 'equal representation
model.'
3.38 The Government's election commitment seeks to build on recent
reforms, which were designed to ensure that the superannuation system is
primarily focused on operating in members' best interests.16
3.39 On 28 November 2013, the Government released the Better
regulation and governance, enhanced transparency and improved
competition in superannuation discussion paper to consult on its
superannuation election commitments. The discussion paper provided
stakeholders with an opportunity to comment on possible reforms to
governance regulations and the outcomes of that consultation are reflected
in the analysis of options in this statement.
3.40 The analysis in this statement is mindful of the need for an
appropriate regulatory framework for the superannuation system as a
whole, one that protects the interests of members, supports the efficient
allocation of savings and one that is not overly burdensome and costly to
administer.
Objectives of Government action
3.41 The Government through its election commitment is seeking to
ensure that superannuation fund boards have increased levels of
independence, as having appropriate provision of independent directors on
superannuation trustee boards is seen as a vital step towards strengthening
the superannuation system.
16
'Best interests' are defined by the sole purpose test in the Superannuation Industry
(Supervision) Act 1993, which focuses on maximising post-retirement benefits. The trustee's
ability to form a fund strategy that generates good long-term returns, while operating within
reasonable risk bounds, is a critical element in serving members' best interests. In general, a
trustee is a person or company (corporate trustee) appointed under the terms of the trust
deed to hold the trust property for the beneficiaries and to make sure that the plan is
operated in accordance with the trust deed. Generally, trustees owe a fiduciary duty to the
beneficiaries. Superannuation trustees must also comply with certain legislative duties.
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
3.42 In particular, the Government considers that independent
directors provide an external, dispassionate perspective, enabling boards
to benefit from a diversity of views and provide a check on management
recommendations. By being free from relationships that could materially
interfere with their judgement, they can provide an objective assessment
of issues.
3.43 The objective of the Government's election commitment is to:
• set a minimum standard, in terms of the number of
independent directors on superannuation trustee boards, to
promote good governance through the broadening of a
superannuation fund board's pool of experience and
expertise. In addition, independent directors allow for an
increased accountability of decisions made by other directors
who may have conflicting interests.
- A 2010 Regnan Research Report notes that the
'empirical research from Australia and overseas lends
support to the hypothesis that board independence and
diversity ... translate into better business performance'.17
• have a common definition of 'independence' to minimise any
ambiguity for the superannuation industry by ensuring that
all APRA-regulated superannuation funds have the same
requirements for determining whether a director is
independent. The intent is for the definition of independence
to be based on ASX principles, but adapted to the
superannuation context.
3.44 The Government's election commitment of ensuring appropriate
provision of independent directors on superannuation trustee boards is
consistent with both the Cooper Review's and FSI's recommendations
(noting that the proposed Government action is not as far reaching as
proposed by the FSI) on corporate governance frameworks and
international best practice.
• Both the Cooper Review and the FSI have recommended
increasing independent directors on super fund boards.
APRA requires a majority of independent directors for its
other regulated entities banks and life insurance companies.
17
October 2010 www.regnan.com.au/documents/Regnan%20Research%20Report.pdf.
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Regulation impact statement -- RSE licensees
• The ASX Corporate Governance Council's Corporate
Governance Principles recommend, on an 'if not, why not'
basis, that Australian listed companies have a majority of
independent directors and an independent chair.
3.45 To progress the Government's election commitments and
provide the superannuation industry with the necessary certainty and
sufficient time to implement the new requirements, the Government is
working towards introducing legislation into Parliament in the
2015 Spring sittings.
International comparisons
3.46 In Canada, it is recommended that the board of directors of
every corporation should be constituted with a majority of individuals
who qualify as unrelated directors.18 In addition, the United Kingdom
Corporate Governance Code recommends that at least half the board
should comprise non-executive directors determined by the board to be
independent.19 As a result, 48 per cent of United Kingdom pension
schemes have at least one independent trustee.20
3.47 In addition, from 6 April 2015, firms in the UK that operate
group personal pension schemes or group stakeholder pension schemes
have been required to set up an Independent Governance Committee
(IGC) (or equivalent). It is intended that IGCs will raise an independent
challenge to the providers of schemes on value for money issues. The UK
Government sees this as a complement to its automatic enrolment policy
of employees into workplace pension schemes, which began in July 2012.
3.48 In New Zealand, an independent trustee is a requirement for
some KiwiSaver Funds (that is, non-default KiwiSaver schemes).
Amongst other things, independence requires that the trustee is not
connected with a promoter of the scheme. The New Zealand
Superannuation Schemes Act 1989 does not have this independent trustee
requirement and, therefore, non-KiwiSaver superannuation schemes
(including complying schemes) have no qualification requirements
attached to the role of the trustee.
3.49 KiwiSaver was regulated differently from other superannuation
funds and managed funds because KiwiSaver was intended to be a
18
Toronto Stock Exchange: Corporate governance -- A guide to good disclosure.
19
Financial Reporting Council (September 2012): The UK Corporate Governance Code.
20
Pensions Governance Survey 2013 (Mercer).
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
long-term savings vehicle, with funds locked in until (in most cases) the
age of eligibility for NZ superannuation.
3.50 In summary:
• In Canada, multi-employer plans established pursuant to a
collective agreement are governed by a board of trustees
composed in accordance with the plan or collective
agreement (typically equal representation -- that is, that the
board of a corporate trustee must consist of equal numbers of
employer representatives and member representatives.
• In the United States, multi-employer (Taft-Hartley) funds
must have equal representation of employers and employees.
• In the United Kingdom, at least one-third of trustees must be
member-nominated.
3.51 It is worth noting that a corollary of the Australian
Government's policy still allows representation of employer and
employee groups on superannuation boards. The composition of
superannuation trustee boards, beyond the one-third independent directors
prescribed, will remain at the discretion of the board (subject to any
requirements set out in the constitution of the trustee and to the
overarching legal requirement that board members are fit and proper and
that boards have an appropriate skill mix).
3.52 This leaves open the ability for trustees to choose to enshrine
equal representation (or voting rules in their constitutions). This outcome
is consistent with representation on superannuation boards across Canada,
the United States and the United Kingdom.
Policy Options
Summary of the recommended options
3.53 In recognition of the extensive work undertaken in the Cooper
Review and the FSI, as outlined above, the following two options were
considered to best implement the Government's election commitment to
ensure the appropriate provision of independent directors on
superannuation trustee boards:
• Option 1: Legislate for a minimum one-third of directors to
be 'independent' with an independent chair. This option
includes a three-year transitional period; or
42
Regulation impact statement -- RSE licensees
• Option 2: Legislate for a majority of independent directors
with an independent chair, with a five-year transitional
period (consistent with the FSI).
3.54 As a result of the cost implications of legislating for a majority
of independent directors, the Government has decided that legislating
one-third independent directors, including an independent chair, strikes an
appropriate balance while still substantially strengthening governance
arrangements.
Detailed discussion of the options to deliver on the Government's
election commitment
Option 1 (Proposed): Legislate for a minimum one-third of directors to
be 'independent' with an independent chair This option includes a
three-year transitional period.
3.55 This option involves mandating that a minimum one-third of
directors on superannuation fund boards be 'independent' with an
independent chair.
3.56 This option would allow the equal representation model to
continue in a modified form. Boards could have the remaining two thirds
split between member and employer representatives. This may result in
some superannuation trustee boards incurring costs and increasing in size
slightly. Costs associated with appointing at least one-third of independent
directors include search and ongoing remuneration costs, as well as
requirements to change trust deeds. There would also likely be increased
compliance costs associated with appointing and remunerating the
additional independent directors.
3.57 A transitional period of three years would minimise compliance
costs, allowing existing directors to leave and new directors be appointed
in an orderly fashion. Typical board appointments are for terms of three
years. Given that compliance costs increase with the number of
independent directors, this option is the preferred option in meeting the
Government's objective of improving superannuation governance.
3.58 Some submissions to the Government's discussion paper Better
regulation and governance, enhanced transparency and improved
competition in superannuation considered that an option that required up
to one-third of independent directors over an appropriate transition period
would meet the Government's objective of improving governance while
considering the compliance costs on superannuation funds. The
recommended governance option is estimated to cost the superannuation
43
Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
industry $12.3 million per year in ongoing costs and $8.5 million in
start-up costs.
Option 2: Legislate for a majority of independent directors with an
independent chair, with a five-year transitional period.
3.59 This option involves mandating that a majority of directors be
independent, which is consistent with the requirement imposed on the
banking and insurance industries by the APRA. This option is stronger
than the ASX Corporate Governance Council's Corporate Governance
Principles and Recommendations (ASX principles), which recommend a
majority of independent directors on an 'if not, why not' basis. This
option is also consistent with, but broader than, the FSI's recommendation
mandating a majority of independent directors and an independent chair
on the board of corporate trustees of public offer superannuation funds
only.
3.60 Compared to option 1, a longer transitional period of five years
would help reduce compliance costs and allow existing directors to leave
and new directors be appointed in a more orderly manner.
3.61 The FSI recommended mandating a majority of independent
directors on the board of corporate trustees of public offer superannuation
funds, including an independent chair. This option is consistent with the
Inquiry's recommendation. The Inquiry notes in its Final Report
(page 134) that 'including independent directors on boards is consistent
with international best practice' and that independent directors 'improve
decision making by bringing an objective perspective to issues' and 'hold
other directors accountable for their conduct'.
3.62 However, this option would result in some superannuation funds
(not for profit funds) being required to change their board composition
markedly. There would be compliance costs associated with appointing a
majority of independent directors (including search and ongoing
remuneration costs, as well as requirements to change trust deeds). This
option could likely result in an overall increase in the size of boards for
many funds with increased compliance costs associated with appointing
and remunerating the additional independent directors.
3.63 Some submissions, particularly from the retail superannuation
fund sector, considered a requirement for a majority of independent
directors over an appropriate transition period would meet the
Government's objective of improving governance while considering the
compliance costs on superannuation funds. One submission noted that a
requirement for majority independent directors was inevitable for
superannuation given this is the standard for other APRA-regulated
entities in the finance and insurance sector. The ongoing costs per year for
44
Regulation impact statement -- RSE licensees
option 2 are estimated to be around $23.3 million per year and start-up
costs are estimated to be around $ 10.5 million.
The options for improvements to superannuation governance were
formulated to consider the following issues: What is the appropriate
number of directors on superannuation trustee boards?
3.64 The provision of independent directors on superannuation
trustee boards is aimed at promoting board diversity and ensuring
members' best interests are front and centre. Increasing the number of
independent directors on superannuation trustee boards is an issue that
requires careful consideration.
3.65 Feedback from consultation (mainly from not-for-profit funds)
indicated continued support for the equal representation model and
opposed any requirement to mandate a proportion of independent
directors.
3.66 Other submissions considered that up to one-third independent
directors could be achievable with an appropriate transition period.
Finally, some submissions supported a requirement for a majority of
independent directors. However, the costs associated with a majority of
independent directors were recognised as a potential hurdle for the
superannuation industry.
3.67 The number of directors on superannuation trustee boards is not
being legislated. Allowing each trustee to determine the optimal size of its
board provides boards with the flexibility to appoint the directors needed
to ensure the right mix of skills and experience to best serve member
interests.
What should be the appropriate transition period to increase the number
of independent directors on superannuation trustee boards?
3.68 Another consideration in implementing a new governance
regime concerns transitional impacts on existing and new board
appointments.
3.69 Feedback from submissions suggested that the transition period
should differ depending on the number of independent directors required.
For instance, the greater the proportion of independent directors on
superannuation trustee boards, the longer the transition period should be
to minimise compliance costs.
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
What is an appropriate definition of independence?
3.70 In considering how to improve governance in the
superannuation industry through increasing the number of independent
directors on superannuation trustee boards, a key issue that needs
consideration is what is meant by 'independent directors'? This is critical
given the potential impacts the definition may have on the pool of
independent directors. For instance, a tighter definition of independence
may limit the pool of candidates, whereas a more flexible definition may
widen it.
3.71 Feedback from a number of submissions indicated that if a
member of a fund is a director, this gives them 'skin in the game' and
therefore does not result in a conflict of interest. This is consistent with
limited liability companies where directors can have a non-material
shareholding and still be independent.
3.72 Other submissions argued that in order to achieve improvements
to governance, it is important that independent directors are at arm's
length from the fund.
Impact Analysis
Impact on industry and consumers
3.73 The proposed enhancements to superannuation governance seek
to improve the superannuation system while ensuring compliance costs do
not outweigh potential benefits to the market and to consumers.
3.74 The proposed options are aimed at improving superannuation
governance, which in turn is expected to provide benefits to fund
members. In this regard, as discussed in the Problem section, the
importance of independence in the decision making process can be seen
through both the comments of Chairs, the SIS Act and eminent academics.
However, it is recognised that while the requirement for increased
independence in superannuation funds is fundamental to improving
governance, and thus improving member outcomes, the full benefit of the
proposed options will only be identified over the longer term. The
Government's election commitment is aimed at ensuring that the best
interests of superannuation fund members are front and centre in trustees'
decision making processes.
3.75 In addition, as the vast majority of trustees of APRA-regulated
superannuation funds are companies (and it is the board of trustee
directors who are responsible for the trustee's decisions and actions),
46
Regulation impact statement -- RSE licensees
these APRA-regulated superannuation funds will benefit by having a
more diverse and skilled board.21
3.76 Community organisations and individuals more broadly are less
likely to be affected directly by the governance reforms. However, all
members of superannuation funds would benefit from improved
governance.
3.77 The main groups affected are industry, corporate and public
sector superannuation funds. These funds are the funds that will be
required to restructure their boards to comply with any new independence
requirements. The changes do not apply to SMSFs.
3.78 The overall compliance cost to the superannuation industry in
start-up costs is estimated to be $8.5 million compared to maintaining the
status quo. The overall compliance cost to the superannuation industry in
ongoing costs is estimated to be around $12.3 million per year compared
to maintaining the status quo. This will result in a compliance cost impact
of $20.8 million in the first year and $12.3 million in subsequent years.
3.79 How superannuation funds choose to respond to the proposed
reforms will depend on the individual funds. The choice of passing on
costs to members or absorbing them will be made by each fund, taking
into account their particular business situation and strategy.
3.80 A detailed breakdown of the cost estimate inputs cannot be
publicly released as some of the data was provided on an in-confidence
basis.
21
A regulated superannuation fund is one which: elects to comply with the SIS legislation; has
either a corporate trustee or pays retirement benefits as pensions; is a superannuation,
pension, provident or benefit fund that is indefinitely continuing.
47
Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
Table 3.1: Governance
Governance Minimum of one-third Majority of independent directors
independent directors and an and an independent chair.
independent chair.
Start-up costs $8.5 million $10.5 million
Ongoing costs $12.3 million $23.3 million
(all funds, per
year)
Board changes Independent Director Independent Director
remuneration: $75,000 per remuneration: $75,000 per
annum. annum.
Change from current Director to Change from current Director to
Independent Director $20,000. Independent Director $20,000.
30 per cent of boards (31 RSEs) 30 per cent of boards (31 RSEs)
will likely increase in size to meet will likely increase in size to meet
the new requirements. the new requirements.
Search costs Newspaper advertisement:
$28,000 for 20 per cent of
impacted RSE licensees.
Executive search firm: $53,000
per director for 80 per cent of
impacted RSE licensees.
Constitution, $14,000 x 101 RSE licensees $14,000 x 101 RSE licensees
Governance
rules, Trust deed
and legal
document
changes
Notes:
1. A transitional period of three years would minimise compliance costs and allow existing directors to leave and new
directors be appointed in an organised fashion (potentially consistent with a fund's existing board renewal
strategy).
2. Current board size is estimated to be on average between 7 to 10.
3. Additional remuneration costs associated with a Chair (if any) are in addition to a Directors normal remuneration.
As such, having an independent chair will not increase costs as the appointment of a chair and the associated costs
are business as usual actions.
4. The development of a traditional plan will align with current obligations on RSEs as such; the costs associated with
a traditional plan are captured through business as usual practices.
5. Currently, 49 per cent of the affected categories have no independent directors. As such, it is estimated that on
average three independent directors will be required to be appointed. However, it is estimated that 40 per cent of
the affected categories will replace existing directors with new independent directors. In this regard, it is recognised
that some current directors may not be currently remunerated; as such it is estimated that 50 per cent of the existing
directors will have cost impact as hiring new directors.
6. Currently, 51 per cent of the affected categories have between one and two independent directors. As such, it is
estimated that on average one independent director will be required to be appointed. However, it is estimated that
40 per cent of the affected categories will replace existing directors with new independent directors. In this regard,
it is recognised that some current directors may not be currently remunerated; as such it is estimated that
50 per cent of the existing directors will have cost impact as hiring new directors.
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Regulation impact statement -- RSE licensees
Methodology
3.81 The primary costs incurred relate to increased remuneration
costs associated with complying with the proposed independent director
requirement. Other significant costs include search and engagement costs,
legal costs (changes to constitutions, trust deeds etc.).
3.82 The two proposed options were costed:
• A legislated majority of independents on superannuation
trustee boards after a five-year transition period; and
• A legislated minimum one-third of independent directors
with an independent chair on superannuation trustee boards
with a three year transition period.
3.83 Data used in the determination of the cost impact of the
proposed options was obtained from the public and private sectors and
both the retail and industry funds sector through direct consultation and
through the two public consultation processes.
3.84 The following assumptions were made:
• 101 RSE licensees with an equal representation board
structure (corporate, industry and public sector funds) will be
affected by the requirement to have independent directors.22
- In some cases this may result in a change in the
composition of boards over time (with the same board size)
and in others, it may result in an increase in board size.
- Remuneration expenses increase when boards increase
their size and/or restructure to meet the new requirements.
• The changes in board sizes are estimated using the current
average range of board sizes in the affected groups, which is
between 7 and 10. The calculation for remuneration of
directors was estimated to be $75,000 per annum for an
independent director and an increase of approximately
22
RSE licensee is the holder of an RSE licence. An RSE licence is the licence granted by
APRA to trustees of APRA regulated superannuation entities and with which the holder can
act as the trustee of an RSE. Trustees of self-managed superannuation funds (SMSFs) and
public sector superannuation schemes are not required to hold an RSE licence. There are
two classes of RSE trustee licences: Public offer entity licence; and non-public offer licence.
To hold a public offer entity licence the trustee must be a body corporate that is a
constitutional corporation.
49
Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
$20,000 when a current director is reclassified or replaced
with an independent director.
• The process for finding new independent directors is
normally undertaken through executive search firms or
newspaper advertising (with an additional due diligence
process).
- Based on data from the superannuation industry, it is
estimated that using an executive search firm will cost
$53,000 per director for each fund. It is estimated the
majority of funds will undertake this process (80 per cent).
- Based on data from the superannuation industry, it is
estimated that newspaper advertising will cost $28,000
(which includes costs associated with due diligence) for each
fund to fully implement the reforms. It is estimated that a
smaller proportion of funds will undertake this process
(20 per cent).
• To ensure compliance with the new requirements
superannuation funds will be required to amend their
Constitutions, Governance rules and Trust deeds to reflect
the new independent director requirements.23 Additionally,
other legal documentation including product disclosure
statements will also need to be updated to reflect the changes
to broad compositions. Based on industry data, it is estimated
these changes will have an initial cost of $14,000 per
superannuation fund.
• It is recognised that new directors may also require additional
training in order to understand and comply with the RSE's
governance structure and procedures in addition to other
legal requirements, it is superannuation funds indicted that
this training can range from $10,000 to $15,000. As such, it
is estimated that affected RSE's will face additional
compliance costs of $12,500 for all new directors.
• In the development of the costing in this Regulation Impact
Statement (RIS) consultation was undertaken with key
23
A trust deed is a document, which sets out the rules for the establishment and operation of a
fund. A superannuation trust deed includes provisions covering such issues as: who can be
appointed and the processes involved in appointing trustees; who will be admitted as
members of the fund; the process for receiving and investing contributions; discretionary
powers of trustees; and the payment of benefits to members.
50
Regulation impact statement -- RSE licensees
industry stakeholders. In this context, one submission
received through the consultation process, indicated that the
costs currently outlined in this RIS did not capture the full
impact of the proposed changes in Option 1. The submission
indicated that the costs outlined were significantly
understated. In particular, the submission indicated that:
- The remuneration costs associated with independent chairs
were significantly higher than normal chairs, contrary to the
assumption used in the costing in this RIS. This assumption
was tested with other stakeholders and these stakeholders
considered that the current assumption used in this RIS was
more appropriate.
- The definition adopted to determine who is considered
independent would have a significant impact on the number of
directors required to be appointed, thus compromising the
assumptions outlined in this RIS. Further, the definition of
independence adopted would also influence the pool of
potential directors from which appointments may be made,
thus resulting in increased remuneration costs for independent
appointees. These statements are considered correct in
principle. However, when tested with other stakeholders, it
was indicted that it was unlikely the definition of
independence if it was broadly in line with the current
definition in section 10 of the SIS Act would result in a
significant change in the assumptions outlined in this RIS.
Summary -- Governance
3.85 In summary, option 1 is the preferred option, as it will give
effect to the Government's election commitment while minimising the
cost impact on the superannuation industry.
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
Table 3.2: Regulatory burden and cost offset estimate table
Average annual regulatory costs (from business as usual)
Change in Business Community Individuals Total change in
costs organisations costs
($ million)
Total, by $13.154 $ $ $13.154
sector
Cost offset Business Community Individuals Total, by source
($ million) organisations
Treasury $13.154 $ $ $13.154
Are all new costs offset?
Yes, costs are offset No, costs are not offset Deregulatory--no offsets required
Total (Change in costs -- Cost offset) ($ million) = $0
The average annual regulatory costs (from business as usual) will be
offset by the compliance cost savings associated with the simplification of
transfer pricing records.
Specific impact on small businesses
3.86 There are 2,428 small APRA funds as at March 2015 that will
be affected by the governance regime. Small APRA funds typically
outsource their trusteeships to 'trustees for hire'.24 These trustees will
need to meet the independent director obligations.
3.87 However, as these trustees frequently act for a large number of
funds, the effect on individual funds should be minimal.
3.88 Self-managed superannuation funds are regulated by the
Australian Taxation Office and not included in the new governance
regime.
24
Trustees of small APRA funds are usually professional trustee companies.
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Regulation impact statement -- RSE licensees
Impact on Government
3.89 The impact on Government will be relatively small and
non-ongoing. In the short-term, implementation costs will be incurred to
draft the legislation for the proposed amendments, and to make changes to
the regulations. The financial impact on APRA and ASIC of these
proposals was addressed in 2010 as part of the previous government's
superannuation reforms arising from the Cooper Review.
Consultation
3.90 Soon after the 2013 election, the Government decided to
progress its superannuation governance election commitment in a variety
of ways, including the issuing of a public discussion paper and exposure
draft legislation. To ensure the consultation process covered all relevant
persons, the Government consulted in the public domain. Due to some
more technical aspects of the Government's policy, the Government also
conducted targeted consultation with stakeholders.
3.91 On 28 November 2013, the Government released a discussion
paper seeking industry's views on the status of reforms covering
governance and transparency. The paper was entitled 'Better regulation
and governance, enhanced transparency and improved competition in
superannuation'. Amongst other things, the discussion paper canvassed
improving trustee board governance through having independent directors
on superannuation trustee boards.
3.92 A total of 90 submissions were received, including 23
confidential submissions. Consultation involved meetings, including
around 14 meetings with representatives from across the superannuation
sector. This consultation informed the assessment of compliance costs.
Stakeholders were also engaged in further direct consultation to assist
with assessment of the cost implications of the policy options.
3.93 The main themes raised by submissions were:
• both support and concern over proposed board governance
changes; and
• the need for appropriate time to implement any legislative
changes.
3.94 A number of submissions, mainly from industry funds, indicated
continued support for the equal representation model and opposed the
proposed requirement to mandate a proportion of independent directors. A
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
number of industry fund submissions, including Industry Super Australia
(ISA), argued that not only is Australia's representative trustee
arrangements consistent internationally, but that equal representation
helps ensure that member interests come first and at the same time has
delivered higher average returns and lower fees than retail funds.
3.95 In particular, the ISA opposed any requirement to have a
specified proportion of independent directors on boards. ISA said that
there should only be a positive obligation on boards to consider if
appointing an independent chair and/or independent directors (up to
one-third of total board membership) may be in the best interests of fund
members.
3.96 On the other hand, the Association of Superannuation Funds of
Australia (ASFA) supported some independence on boards and said that if
a requirement for independent directors is mandated, at least one-third of
the directors on superannuation boards should be independent with an
independent chair.
3.97 Another key consideration in the discussion paper was the
appropriate transition period to implement the new governance regime.
Submissions suggested that the transition period should differ depending
on the number of independent directors required. For instance, the greater
the proportion of independent directors on superannuation trustee boards,
the longer the transition period should be to minimise compliance costs. In
particular, there was a range of views ranging from three years (for
example, ASFA) to five years (for example, the (AIST.
3.98 An early assessment stage RIS (OBPR ID 16729) was prepared
for consideration prior to the development of exposure draft the
legislation.
3.99 On 26 June 2015, the Government released draft legislation to
require one-third independent directors on superannuation trustee boards.
Consultation closed on 23 July 2015. Thirty-one written submissions were
received in response to this consultation, of which two were confidential.
3.100 In the week beginning 27 July 2015, officials from Treasury met
with a wide range of stakeholders in Melbourne and Sydney to seek views
on any technical issues and unintended consequences with the draft
legislation.
3.101 The policy issue of independent directors is a threshold issue for
some parts of the industry, with views split to some extent between retail
and industry funds. For example in their submission, the ISA said, 'the
approach adopted in this draft Bill will not strengthen the governance of
superannuation funds. It is misdirected, imposes rigid and inflexible
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Regulation impact statement -- RSE licensees
regulation, intrudes into the private affairs of a corporation without a
rational or compelling basis, and will undermine the representative trustee
system'. The AIST submitted that the changes 'will impose significant
costs and introduce risks to the industry for no good reason. The changes
also take Australia in the opposite direction to the rest of the world by
removing member representation from boards of occupational-based
retirement savings funds'.
3.102 Australian Super continued to raise strong reservations on the
benefits of moving away from the current governance requirements, 'the
prevailing governance arrangements for industry funds have produced
very strong results for fund members. The case for a mandatory
proportion of independent directors has not been made on merit grounds.
Indeed the empirically-based grounds for maintaining the currently
successful equal representation model are very strong.'
3.103 However, a number of stakeholders did support the
Government's policy of a minimum one-third independent directors. For
example, the Association of Superannuation Funds of Australia said that it
'supports increasing the number of independent directors on the boards of
superannuation funds and recognises that over the past few years many
trustee boards have already taken the opportunity to supplement their
skills and have appointed independent directors.' The FSC said a
'requirement to have independent directors and an independent chair on
the boards of superannuation trustees is consistent with international best
practice for corporate governance and is in the best interest of consumers.
It is consistent with recommendations from the Super System Review and
the Financial System Inquiry.' Catholic Super said the 'Government
rightly considers independent directors on superannuation trustee boards
as a way of strengthening the current superannuation system'. The
consultations helped to refine the draft legislation to superannuation
governance and informed the final assessment of compliance costs.
Conclusion
3.104 A strong and stable superannuation system is an important part
of the Government's policy program to build a stronger and more
prosperous economy.
3.105 These reforms deliver on the Government's intention to align
governance structures in the superannuation system more closely with
corporate governance principles applicable to ASX listed companies.
Consultations revealed that while stakeholders remain polarised on the
overarching policy question of whether or not independent directors
should be mandated by law, the majority of parties consulted were able to
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
move beyond this point and provide very useful views on ways to improve
the robustness of the draft legislation.
3.106 The main issues arising from consultation on the draft
legislation were:
• a preference for realigning the split between the law and the
powers given to the Regulator (APRA) by including more
provisions in the Bill to provide greater certainty to
stakeholders;
• certainty that the length of the transition period will be three
years;
• a preference for retaining the equal representation rules
contained in the current Part 9 of the SIS Act and the
two-thirds voting rule; and
• a number of technical drafting issues that will clarify the
intent of the law.
3.107 These issues have been taken into account in redrafting the final
Bill.
3.108 We confirm our view that option 1 is the best policy option. In
contrast to option 2, that a board should have a majority of independent
directors, we believe that proceeding now with one-third independent
directors, including an independent chair, strikes an appropriate balance
while still substantially strengthening governance arrangements. The
Government is also mindful of the scale of change that would be required
if a majority of independent directors was mandated.
Implementation and Review
3.109 The Government intends to implement option 1 by introducing
legislation into Parliament in the Spring Sittings with a commencement
date being the day after this Act receives the Royal Assent.
3.110 Success will be measured by how quickly superannuation trustee
boards move to a minimum one-third independent directors. However, the
ultimate yardstick will be at the end of the three-year transition period to
assess how many trustees are compliant with the requirements. Another
measurement will be how many trustees may need to use the potential
relief on offer from the Australian Prudential Regulation Authority, where
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Regulation impact statement -- RSE licensees
a bona fide effort has been made throughout transition and a compliant
transition plan been lodged with APRA.
3.111 Some parties have indicated that there could be difficulties in
finding sufficient number of independent trustees; however the Australian
Institute of Company Directors maintains a large data base of members
who are seeking board positions, many of whom would be suitable. Funds
who currently have independent directors commented that they have not
had any problems in finding suitable candidates.
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Chapter 4
Board of CSC
Outline of Chapter
4.1 Schedule 2 to this Bill amends the Governance Act to enable the
CSC Board to comply with the independence requirements set out in
Schedule 1.
4.2 All legislative references in this chapter are to the
Governance Act unless otherwise specified.
Context of amendments
4.3 The Australian Government's main civilian and military
superannuation schemes come under the trusteeship of the
Commonwealth Superannuation Corporation (CSC), an RSE licensee. The
CSC and the board that governs the CSC are established by the
Governance Act.
4.4 The amendments are to enable the restructure of the CSC Board
to comply with the increased independence requirements, set out in
Schedule 1, by the end of the transition period.
Summary of new law
4.5 Schedule 2 to this Bill introduces new independence
requirements in respect of certain CSC Board positions, consistent with
the provisions contained in Schedule 1.
4.6 Following the commencement of Schedule 2, any person
nominated by the Minister for Finance for appointment to the CSC Board
must be independent from CSC. The Chair of the CSC Board, which must
currently meet the definition of independent director under section 10 of
SIS Act, will be required to comply with the new definition of
independent contained in new section 87.
4.7 This Schedule will not affect any CSC Board appointments
made before the commencement of Schedule 2 to this Bill. In addition,
this Schedule will not affect the arrangements relating to the appointment
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Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017
of CSC Board directors who are nominated by the Chief of the Defence
Force and the President of the Australian Council of Trade Unions.
Detailed explanation of new law
Independence of directors
4.8 To facilitate the effective operation of the amendments in
Schedule 2, independent from the CSC has the meaning given by item 2
of Schedule 2 and RSE licensee has the same meaning as in the SIS Act.
[Schedule 2, item 1, definitions of 'independent from the CSC' and 'RSE licensee' in
section 4]
4.9 To enable the CSC Board to comply with the new increased
independence requirements set out in this Schedule, the Schedule requires
that any appointment of a director nominated by the Minister for Finance
that takes effect after commencement must be independent from CSC at
the time the appointment is made. An independent director must meet the
requirements set out in the new definition of independent contained in
new section 87 of the Schedule 1 to this Bill. [Schedule 2, item 2, subsection
12(4) and 12(4A)]
4.10 After Schedule 2 commences persons selected by the Minister
for Finance for a relevant acting appointment that commences on or after
that time must also be independent. [Schedule 2, item 6, subsection 18(2A)]
4.11 An appointment of an independent director continues to be valid
if that director ceases to be independent from CSC. The director would
not, however, continue to count towards the new requirement contained in
this Schedule for trustee boards to consist of at least one-third independent
directors. [Schedule 2, item 3, subsection 12(7)]
4.12 Section 17 has been expanded to provide the Minister for
Finance the power to terminate the appointment of an independent
director on the grounds that they have ceased to be independent from
CSC. [Schedule 2, items 4 and 5, subsections 17(5A) and 17(6)]
Application and transitional provisions
4.13 Existing appointments (including the appointment of a person to
act as a director) and the termination of existing appointments to the CSC
Board that occur before Schedule 2 to this Bill commences are not
affected by the amendments in this Schedule. [Schedule 2, subitems 7(1) to
7(3)]
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Board of CSC
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011
Board of CSC
4.14 This Schedule is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3
of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview
4.15 Schedule 2 to this Bill amends the Governance Act to enable the
CSC Board to comply with the independence requirements set out in
Schedule 1.
Human rights implications
4.16 This Schedule does not engage any of the applicable rights or
freedoms.
Conclusion
4.17 This Schedule is compatible with human rights as it does not
raise any human rights issues.
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