Australia’s $2.9 trillion superannuation industry is in a state of flux. Following recent reports from the Productivity Commission and Hayne Royal Commission, government and regulators have sought to rapidly implement a range of new measures aimed at addressing the various shortfalls identified. Meanwhile, the political spotlight on superannuation has only intensified, with further reviews and regulatory change already in the works.
In the face of exponentially increasing regulatory complexity, trustees are now personally liable and subject to severe penalties for failing to serve members’ best interests. In this challenging and uncertain environment, it is appropriate to ask: who are the guardians of the nation’s retirement savings and do they truly understand their responsibilities and liabilities?
Higher standards, higher penalties
Until 2013, trustee directors were simply expected to show the level of skill and care of a ‘prudent person of business.’ Recognising the significant, and specialised, responsibilities intertwined with governing the nation’s retirement funds, Government raised the bar through the Stronger Super reforms to require trustees to demonstrate the level of ‘skill, care, and diligence’ expected of a ‘prudent superannuation trustee’.
Going further still, this year’s Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Act, transformed a breach of this covenant into a penalty provision. This means that, while previously only members could hold trustees to account for breaching these covenants, the regulators now have a direct tool to prosecute and sanction trustees and trustee directors through court action, with civil penalties of up to $420,000 and criminal penalties of up to five years in prison. These penalties, and the mechanisms by which they can be enforced, place the crosshairs directly on those that fail to act diligently and faithfully in the best interests of their members.
Less clear, perhaps, is the definition and ramifications of the term ‘prudent superannuation trustee’. Trustee boards must ask themselves what this means in practice, and do I, and my board colleagues, meet this definition? The conclusion for many may be that unless you specialise in superannuation governance, you shouldn’t be in the business of superannuation governance.
Not to mention, the duties to act in the best interests of members, and to exercise the appropriate level of care, skill, and diligence, are far from the only trustee covenants now subject to these penalty provisions. Recent legislation imposes further obligations still. For example, trustees must now maintain appropriate investment and insurance strategies that are annually reviewed in the form of ‘outcomes assessments’.
Many, if not all, of these duties are targeted towards genuine issues, and serve proper purposes in seeking to ensure that the men and women charged with supervising our retirement savings are doing everything they can – and ought to – do to ensure financial security and prosperity for our ageing population. In such a marked transitional period, however, it’s unclear if existing providers have the infrastructure in place to keep apace.
What is clear, however, is the significant change in attitude from the regulators since the Royal Commission. Trustees can now expect more proactive regulators armed with a ‘why not litigate’ mindset, and the mandate and federal budget to rigorously do so.
BEARing the regulatory burden
Adding to the regulatory burden and liability of directors is the Royal Commission’s recommendation that the Banking Executive Accountability Regime, or BEAR, is extended to superannuation trustees.
Under this regime, not only do the entities themselves face accountability obligations, but all directors and senior executives are personally obligated to meet the BEAR requirements.
These obligations go significantly beyond basic compliance, and instead seek to instil cultural change that ensures directors’ interests are focused on sustainable good governance, as opposed to short-term gains. This includes careful consideration of long-term and structural risks, managed through proactive compliance and comprehensive reporting of accountability statements, remuneration policies and more.
Already introduced for banks, this regime is likely to come into effect for superannuation sooner rather than later.
Doubling down on this theme, APRA has proposed their own, distinct yet overlapping, set of standards, CPS 511 Remuneration, which is currently open for consultation. In the associated discussion paper, APRA openly acknowledge this overlap and the difficulties it is likely to cause trustees. The view, presumably, is that a regulatory overlap is better than a regulatory gap. The outcome, however, is a regulatory burden that continues to increase in both size and complexity.
BEAR is just one example of a broader trend in the changing approach towards regulating the nation’s retirement savings. Responding to recommendations from various reviews and commissions, both APRA and ASIC have indicated that in judging the performance of funds, returns will no longer be the sole focus. Instead, funds and trustees can expect issues relating to culture, compliance, governance and accountability to come under direct scrutiny.
Although the loss of control over remuneration for directors – and the risk of having remuneration clawed back in future for poor enduring outcomes – may be the first thing that grabs many boards’ attention, it is this broader emphasis on structural and cultural change that requires the most consideration. Any trustee under the misapprehension that things are still ‘business as usual’ is likely to end up in hot water – especially given the calls contained in the Government’s recent capability review for a ‘cultural and regulatory reset’, and a renewed emphasis on members, in APRA’s approach to regulating superannuation.
Trusting a specialist
With so much regulation, from many, sometimes conflicting sources, trustees face an incredibly challenging environment. In amongst all this change and complexity, they must be certain of their requirements and obligations.
To successfully navigate regulatory complexity, APRA has expressly stated that they expect superannuation trustees to have a Chief Risk Officer overseeing an independent risk function that reports directly to the CEO and board. Unfortunately, as yet, not all do.
However, it is not enough to rely solely upon a risk and compliance function. In times of such intensive and broad-reaching changes in the industry, staff and officers from all levels, and across all business areas, must be provided with ongoing training and guidance. Moreover, they must come together to actively engage with the change, and seek to understand its aims, in order to develop the best outcomes for members.
Doing so may well prove to be the jolt superannuation needs to continue its development as a truly unique and valuable national asset. Simultaneously, however, such requirements represent a significant on-going cost to trustees, requiring comprehensive changes to practices and processes throughout many business areas. Implementing these practices is a challenge for all trustees, and without significant scale, it may well prove beyond some.
Add to this the prospect of personal liability, severe penalties and aggressive enforcement, trustee directors would be prudent to consider if they are really equipped to manage their own responsibilities and liabilities, as well as that of their fund?
The conclusion must surely be that unless you specialise in superannuation governance, you shouldn’t be in the business of superannuation governance.
The superannuation industry is critical, not just to retirees, but to Australia’s economy at large. All efforts to improve the structure and governance of superannuation, and therefore the retirement outcomes for Australians, are to be welcomed. However, with so much change so quickly, trustees are at risk of failing under the weight of regulation.
Alternatively, funds can look to outsource this burden to independent, specialist trustees, allowing risks to be managed by informed experts free from structural conflicts.
At Sargon, trusteeship and compliance is our core business. Our combination of financial licences, industry expertise and purpose-built trustee cloud infrastructure mean we are uniquely equipped to deliver independent and compliant trustee services with an unwavering focus on members’ best interests, so you are free to focus on your clients and growth.
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