Superannuation has been sloppy on conflicts of interest

Corporate superannuation funds need to take immediate action on their risk management and outsourcing approaches, while all superannuation funds need to be more aware of conflict of interest, according to superannuation consultancy, The Heron Partnership.

"There is a certain sloppiness and haziness that has crept in over time," warns Heron Managing Director, Christopher Butler.

"Clearly a relaxed attitude to conflict of interest has gone way too far when the consultancy that provides all or most of the services for a superannuation fund also provides or has control over the trustee function," he said.

Mr Butler said the Australian Prudential Regulation Authorityâ??s (APRA) warning was very timely that both large and small superannuation funds were equally at risk of failure.

"Concern with safety of retirement incomes is part of a worldwide trend.

"APRA is right to indicate that action is required, but not an over reaction. What we donâ??t need are scare or alarmist comments undermining the credibility and standing of the Australian Superannuation system.

"We need a superannuation system that all Australians understand and have a strong sense of confidence in," Mr Butler said.

He said APRA therefore has a major function to fulfil as do the other key players in the superannuation equation, namely; Employers, Trustee Boards, Product/Service Providers, Auditors, Actuaries and Consultants.

However, Mr Butler warned it is wrong to suggest the system needs a complete overhaul.

"There is a danger that over-reaction could lead to a more complex and over regulated environment, meaning increased costs to the consumer. Over-reaction could result in lower retirement incomes and greater reliance on government funded age pensions.

"Self-regulation rather than a prescriptive approach is what we need. â??Itâ??s up to superannuation funds to demonstrate best practice corporate governance as proof that we do not need wholesale regulation change," Mr Butler said.

ATTACHMENT: Key Issues
KEY ISSUES IN SUPERANNUATION SAFETY
Provided by The Heron Partnership

Those responsible for their employer-sponsored superannuation need to be able to demonstrate that they are operating under a protective umbrella of independence, strictly in the interests of their employees and therefore avoiding issues of potential conflict of interest and potential risk.

We propose that those responsible for superannuation take a close look at the following issues:

1. Operational risk management
   1. Separation of advice and service/product supply. Are the advisors to your superannuation fund the same people that seek to manage your fund through a master trust?
   2. Does your fund have a current risk management, identification, and clarification and mitigation plan in place?
   3. What fraud prevention strategy and practices does your superannuation provider have in place?
   4. What strategies and plans are in place to deal with the concentrations of risk around outsourcing or investments?
   5. What indemnities are provided by service providers against E & Oâ??s?
   6. What priority commitments are in place for your plan if your outsource provider is also a competitor?
2. Asset/liability risk management
   1. Is your asset consultant employed by the same business that provides the investment management service?
   2. When did you last review your investment management arrangements including you asset consultant and the costs being imposed?
   3. How do you monitor your implemented investment arrangements?
   4. Is your liability profile well defined and hence the asset/liability risk in regards to Member Investment Choice mitigated?
3. Outsourcing
   1. Are you using an Independent Consultant to provide strategic advice on your future employer-sponsored superannuation structure and service providers?
   2. Have you engaged an Independent Consultant to oversee the ongoing operation of your superannuation arrangements?
   3. When did you last undertake a cost analysis to ensure your employees are not being over charged for their superannuation fund?
   4. Outsource arrangements are invariably insourced to the fund promoter, particularly administration services. For member protection a periodic independent review of performance is essential.

In superannuation, the members' interests are protected by the superannuation fund Trustee Boards. Their importance cannot be overstated and we therefore have some concern, in particular from a corporate governance perspective, when so called "independent" Consultancies, who provide all or most of the fund services also act as or "control" the Trustee body for the fund. A clear conflict of interests!

Independence of the Trustee is therefore fundamental. If the Trustee Board does not have a structure of employer and member appointed or elected directors then clearly there is a need for sufficient independent directors who have no association whatsoever with the fund promoter.

Many master trusts have poor track records on conflict of interest. For example, many advisors to funds are also employed by the fund sponsor or promoter. Good corporate governance says that there needs to be a separation of duties and responsibilities.

Therefore, at a minimum the fund auditor needs to be separate to the consultant as well as the actuary, the actuary needs to be separate from the administrator and the asset consultant needs to be separate from the fund manager. In addition a strategic consultant, often engaged by an Employer to advise on a companyâ??s future superannuation arrangements needs to be separate from the product provider.

The potential conflict of interest involved when so called independent consultancies handle the administration, asset management and advice for a clients employer-sponsored superannuation fund is a superannuation "ticking time bomb" that needs to be addressed before a major fund failure occurs.