In October this year, an industry superannuation fund joined with fund managers to use its $1tn portfolio for good.
Hesta, working with some of Australia’s biggest investor funds, including IFM Investors and BlackRock Australia, started the 40:40 Vision project, which asks the 200 largest companies on Australia’s stock exchange to pledge to have at least 40% of their executive roles filled by women by 2030.
The industry fund for the health and community service sectors has about 860,000 members, 80% of which are women.
It makes sense that the fund that manages the retirement incomes of a majority female client base would want to see women making decisions in the companies that affect their investments.
That would surely count as being in the best interest of members. But would it be in the best financial interest? And could, when asked, a quantifiable benefit be proved?
And under proposed changes to how superannuation funds are run – presented as “your future, your super” – the Hesta initiative, could, in theory, see its board dragged in front of a government-run parliamentary committee demanding to see “robust quantitive and qualitative evidence” to support their actions.
Also out – advertising and lobbying, with boards unable to green light members’ funds to be used for either. Products such as the New Daily, an online publication launched in 2013, first owned by three super funds and now funded by Industry Super Holdings, would also be in question.
Retail funds – those run by banks and financial institutions, which have shareholders and therefore must return those profits to shareholders and investors, who offer MySuper products – will also be privy to these new burdens.
But the overwhelming target of the rule changes is industry super funds – which, as the name suggests, started life as funds run for workers in particular industries, and which, as of the last quarter, now control more than $760bn worth of assets – $163bn more than retail funds.
The tide in Australian super investment changed during the banking royal commission, the results of which saw Australians shift about $11bn from retail funds to industry super funds.
With industry funds – most of which have union involvement – growing in financial power, and member influence, there has been a renewed interest from the government in how super funds spend their money.
Andrew Bragg and Tim Wilson, both backbenchers with big aspirations, have made their names in the Coalition by taking on super funds – mostly targeting industry funds – with a goal to control how those funds spend members’ money.
Labor: the party of super rent seekers. Always putting workers last. https://t.co/fXdj0Cwb8P
— Senator Andrew Bragg (@ajamesbragg) November 26, 2020
The first step was allowing people financially impacted by Covid to access up to $20,000 of their superannuation savings. More than $60bn was withdrawn from superannuation funds, in a move that will cost a member in their 20s up to $100,000 by the time they reach retirement age.
The campaign to allow members to use their superannuation for a home deposit, which proponents, including Bragg and Wilson and colleagues Jason Falinski and Dave Sharma, say would help young Australians buy their first home, is also under way in earnest.
The retirement income review released by the government urged Australians to consider their home as part of their retirement savings, while also pointing out home owners maintained an acceptable quality of life in retirement, while renters suffered financial stress.
The debate has set up a false binary choice – between home ownership and retirement – with super funds (and members’ retirement stability) at the centre. The increase to the superannuation guarantee, which was to raise compulsory super saving from 9.5% to 12% by 2025, also looks like being scrapped under the Coalition government.
The latest salvo is the “your future, your super” changes, which aim to wrap super funds and their trustees in red tape, requiring all decisions to come with documentary evidence of how actions – such as advertisements, lobbying and initiatives – serve members financially.
Super funds and their advocates have said they will examine the legislation before making comment. Labor is expected to stand against the latest changes, with the crossbench once again the deciding factor.
The explanatory notes attached to the legislation detail the necessitation of the changes because “numerous reports and hearings in recent years have highlighted the extent of spending by superannuation funds on discretionary items like advertising, sponsorships and corporate entertainment. Inappropriate expenditure on these items risks compromising member outcomes and eroding retirement incomes.”
During the banking royal commission (which was opposed by the government 26 times) it was retail funds in the spotlight. Wilson argues the government-led parliamentary committee tasked with keeping the financial sector in check has found industry super wanting.
Yet we’ve exposed them charging ‘fees for no service’ and even changed the law to stop them, as well as pushing dodgy information to the public square and @asicmedia & @APRAinfo are now doing a joint investigation into the potential for insider trading, among others ...
— Tim Wilson MP (@TimWilsonMP) November 26, 2020
The parliamentary committee doesn’t have punitive powers itself but can make recommendations, including for legislative change, which would allow regulators the power to enforce the desired outcomes.
Under the changes, super funds must be able to prove “how any action will yield financial benefits to the beneficiaries of the superannuation entity”.
“The identification of a quantifiable financial benefit to members is a threshold consideration for trustees in assessing whether the proposed exercise of their power will fulfil the requirements of the duty,” the explanatory notes report.
“Trustees will need to have robust quantitative and qualitative evidence to support their expenditures.”
But it will be done on a case by case basis – and the onus is on the trustees of the super fund to be prepared to answer for their actions at any time.
“So long as the expenditure is essential to the prudent operation of a superannuation entity, and reporting and monitoring frameworks for such expenditure are put in place by trustees to ensure that the expenditure is necessary and competitively priced (and any ongoing expenditure continues to achieve its intended outcomes), then the expenditure decision would likely be regarded to be in the best financial interests of the beneficiaries.
“Whether the expenditure ultimately is or is not in the best financial interests of beneficiaries will of course depend on all of the circumstances of the relevant case.”
And it won’t be as easy as outsourcing actions to a third party. Third-party payments would also be subject to the new rules, which would put the New Daily publication, a favourite question topic for Coalition senators, under the microscope.
“As with the existing best interests duty, the new best financial interests duty will continue to apply to an exercise of a trustee’s powers in making payments to third parties by, or on behalf of the entity or fund.”
The amendments specifically clarify this as third-party payments tend to be particularly subject to abuse.
These actions by a trustee must be in the best financial interests of beneficiaries. The trustee should be able to produce evidence supporting its decision, and have oversight that monies paid are being used by third parties for the intended purpose.
“Trustees cannot hide behind unjustifiable claims that they are ignorant of what they are purchasing. Trustees should reasonably know what they are purchasing, and such purchases should be in the best financial interests of beneficiaries.”
Which, in essence, means prove that every action you take as a fund benefits members financially.
Something like Hesta’s 40:40 Vision project would be harder to justify as a quantifiable financial benefit, despite its obvious benefit to members and society at large.
It all depends on where the government wants to draw the line. And under these changes, right now, it is wherever it wants to.