”Superannuation’s Role in Advancing the Power and
Economic Influence of the Union Movement”
Speech to HR Nicholls Society
Introduction
It is a great pleasure to be here today to speak to this important conference of
the HR Nicholls Society.
I want to speak today about the role of superannuation in advancing the power
and economic influence of the union movement.
In the early nineties, when ACTU secretary Bill Kelty was agitating for the
Hawke Keating government to legislate 6 per cent superannuation, and to
double it again by the end of the decade, many were asking what he was doing
about declining union membership.1
Since that time the share of the workforce who are union members has
continued to fall: it now stands at a mere 18 per cent, and only 13 per cent
amongst private sector employees.2
Yet through the sharp growth in the size and economic importance of two kinds
of union-linked superannuation funds – industry funds and public sector funds –
the union movement has gained a new source of power and influence.
Thanks to decisions of the Hawke Keating Government – reinforced by more
recent policies of the Rudd Gillard Rudd Government – the structure and
governance of today’s superannuation system suits the interests of the union
movement, and union officials, very nicely indeed.
1
Bill Kelty, Transcript of Speech to National Press Club, Wed 31 July 1991, Department of the Parliamentary
Library.
2 ABS, 631 0 .0, Employee Earnings , Benefits And Trade Union Membership, August 2012
1
I want to emphasise that the Coalition supports superannuation, and our
superannuation savings pool is a key national asset. Whether the current
governance arrangements are the best ones for the task is a very different
question.
Nor does the Coalition prefer any one sector of the superannuation industry over
any other sector. Our preference is for an efficient, competitive superannuation
industry which serves Australians building up savings for their retirement in the
most cost-effective way. As long as different fund types are competing on a
level playing field – we say good luck to all of them.
Today I want to start by looking at the large and growing share of the
superannuation system held by public sector and industry superannuation funds.
Next, I want to highlight the very close linkages between these two types of
funds and the union movement.
My third proposition this afternoon is that the Rudd Gillard Rudd Government
has further tilted the playing field in favour of industry and public sector funds –
while ignoring recommended governance changes that would increase
competition and transparency and weaken the union linkage.
Finally, I want to argue that the current arrangements raise serious policy
problems which must be addressed – and touch on the Coalition’s agenda in this
area.
The Size and Growth of the Superannuation Sector
Let me start by observing that the superannuation sector has grown very
strongly since compulsory superannuation was introduced, and now makes up a
substantial sector of the economy. Total superannuation funds under
2
management are now almost 1.6 trillion dollars, up from $164 billion in June
1992 when compulsory superannuation was first introduced.3
Industry regulator APRA divides superannuation up into several classes of
funds, two of which are of particular interest to us because they are the ones
with substantial numbers of union appointed directors: industry funds and
public sector funds. APRA estimates that total assets of these two types of
funds stood at almost $560 billion in March 2013 – representing over 35.4 per
cent of the total superannuation pie.4
A particularly striking statistic about superannuation, in my view, is that annual
contributions, in the year to June 2012, were around $91 billion. This is a
massive amount of money – and of this amount, around $59 billion, or 65 per
cent, went to industry and public sector funds.5
In other words, while industry and public sector funds together have a bit over
one third of total assets in the superannuation sector today, they are winning
almost two thirds of the contributions flow coming into the sector – so they are
steadily increasing their market share.
Extent of union control of industry & public sector funds
Why are industry and public sector funds increasing their market share? In my
view, one explanation is that they enjoy some distinctive advantages in the way
the current system operates. These advantages arise because of the close
relationship between industry and public sector funds on the one hand, and the
union movement, on the other.
3
APRA, Quarterly Superannuation Performance, March 2013 (issued 23 May 2013); Parliamentary Library
calculations based on ABS and APRA data
4 APRA, Quarterly Superannuation Performance, March 2013 (issued 23 May 2013)
5 APRA, Annual Superannuation Bulletin, June 2012 (issued 9 January 2013), Table 8, p 39
3
The relationship works through the appointment of directors to the trustee
companies of these funds.
Under the so-called ‘equal representation’ model, mandated by the
Superannuation Industry Supervision Act, up to half of the directors of an
industry fund are typically appointed by a union. 6
For example, Australian Super, the largest industry superannuation fund, with
$47 billion under management, has half of its directors appointed by the ACTU,
and half appointed by the Australian Industry Group.7
While the equal representation provisions do not apply to public sector funds,
Labor state and federal governments have taken care to entrench union
appointments in the governing arrangements for public sector funds.
I recently decided to examine the relationships between unions and industry and
public sector funds. To do this, I started with the report issued by industry
regulator APRA in January this year, Superannuation Fund-level Profiles and
Financial Performance, which lists 301 individual funds and gives data for
them as at 30 June 2012. Of these, there are 74 funds categorised as industry or
public sector superannuation funds by APRA.8
I then went to the annual reports of each of these funds to identify their directors
and their net assets. In total, these funds reported net assets of $383 billion.9
Superannuation Industry Supervision Act 1993 s 89. This requires that a so-called ‘employer-sponsored fund’
have half its directors as ‘member representatives’ and half as ‘employer representatives’, with ‘member
representative’ defined as someone nominated by either the members of the fund or ‘a trade union, or other
organisation, representing the interests of those members.’ There is also provision for one so-called independent
director.
7 Australian Super, Annual Report 2012, p 42, p 54
8 APRA, Superannuation Fund-level Profiles and Financial Performance, June 2012, issued 9 Jan 2013, table 9
9 In most cases the annual report was for the year ended 30 June 2012. As a cross check on the figure of $383 bn
derived from the annual reports, the total ‘cash flow adjusted net assets’ (column W) for industry and public
sector funds in table 9 of the APRA report is $372.2 bn. This number is considerably less than the $558.6 bn
reported by APRA for these two classes of funds as at March 2013. The difference appears to be due to three
factors. First, Superannuation Fund-level Profiles and Financial Performance excludes some smaller funds and
hence the totals it reports are smaller than system wide totals. Second, between June 2012 and March 2013
6
4
Most interesting for present purposes though is the total number of directors
across these funds – and how many were appointed by unions.
Across the 74 funds, it turns out when I totalled up the numbers across the
annual reports, that there were 551 directors in total, and of these 171 were
appointed by unions. In other words, the unions appointed 31 per cent of the
directors.10
When you look at the total positions for so-called ‘members’ representatives’,
the dominance of the unions was even greater. There were 41 independent
directors or chairs across these funds. Of the 510 other positions, a 50:50 split
would leave 255 positions as ‘member representatives.’ Of these, the unions
therefore appointed over two thirds.
If you just take the biggest funds, these are even more tightly linked into the
union movement. The ten biggest funds, as at 30 June 2012, had total net assets
of $250 billion. Across these funds, there were 112 directors in total, of which
8 were independent, and 48 union appointed directors. This means that the
unions appointed 92 per cent of the 52 spots theoretically available for member
representatives.
To cite some examples, the biggest fund, with $47 billion, was Australian
Super, with 6 of its 12 directors appointed by the unions; next was the
Queensland State Public Sector Superannuation Scheme at $36 billion, with 6 of
12 directors appointed by unions; then the NSW First State Superannuation
Scheme, at $33 billion, with 6 of 13 directors appointed by unions; the Retail
Employees Superannuation Trust, at $22 billion, with 4 of 8 directors appointed
there were significant contributions inflows, exceeding $40 billion for these two classes of funds. Thirdly, in
this period equity markets were up strongly and hence asset values rose strongly.
10 The source for the figures in this paragraph and several following is the analysis I conducted as described
earlier.
5
by unions; and Sunsuper at $20 billion with 3 of 6 directors appointed by
unions.
It is also interesting to look at the question from the other perspective: which
unions are doing the appointing. Here what we see is a considerable
concentration, with the largest and most powerful unions appointing directors to
multiple different funds.
The ACTU appoints 20 directors across seven different industry and public
sector superannuation funds, which have under management in total over $100
billion. Unions NSW appoints nine directors to several different funds. The
CFMEU appoints 15 directors across four funds. The Australian Workers'
Union, has nine directors across seven funds. The Electrical Trades Union
appoints 13 directors across six funds.
As to the question of who the unions appoint, in the great majority of cases they
choose to appoint union officials. Very few of them make any effort to appoint
people with expertise in superannuation; or to appoint a representative selection
of members of the superannuation fund – as opposed to members of the union.
Consider for example TWU Super, a fund with $2.6 billion under management
and 130,000 members, with four directors appointed by the Transport Workers
Union. The four directors appointed are the TWU's federal secretary Tony
Sheldon and three state secretaries: Wayne Forno, Wayne Mader and Jim
McGiveron.11
Of course, appointments to the boards of super funds generally bring directors’
fees. At Australian Super the chair earned $160,984 in the 2012 financial year;
at CBUS the chair earned $187,183 and board members earned nearly $18,000 a
11
TWU Super, 2012 Annual Report, pp 8 & 14
6
year plus a fee per meeting of $2,128; at HESTA the chair earned $76,000. 12 In
some cases directors’ fees are retained by the individuals, in other cases they are
paid to their appointing unions, but in either case the arrangements are quite
satisfactory from the perspective of union officials and the union movement.
Incidentally, I found only a few funds which disclose in their annual reports
what their union-appointed directors do with the fees they receive. In most
cases, fund members are none the wiser as to whether the fees are retained by
those directors personally or are paid to the appointing union.
There is certainly anecdotal evidence that some union officials appear to have
navigated quite carefully to maximise their earning potential from union related
superannuation activities. Consider for example Mr Bernie Riordan, a former
secretary of the NSW Electrical Trades Union and a former president of the
Australian Labor Party in NSW (before he was appointed last year by the Rudd
Gillard Rudd Government to the Bench of the Fair Work Commission).
Mr Riordan had previously been a director of Energy Industry Superannuation
Scheme, a public sector superannuation fund for NSW energy sector workers,
as well as a director of two companies which EISS part owned, FuturePlus
Financial Services and Chifley Financial Services. The Sunday Telegraph
reported in 2011 that Mr Riordan was at that point receiving directors’ fees
from these three boards and one other totalling up to $264,625 a year.13
A statement of claim filed in the Federal Court in 2011 by Dean Mighell,
secretary of the Victorian branch of the ETU, alleged that Mr Riordan had
received over $1.8 million in fees since 1998 from sitting on the boards of the
12
Australian Super, 2012 Annual Report, p 51; CBUS, 2012 Annual Report, p 36; HESTA 2012 Annual Report,
p 26
13 B Crawford, Bernie sued for copping mates rates, Sunday Telegraph, July 17, 2011.
7
Energy Industries Superannuation Scheme, Futureplus Financial Services,
Chifley Financial Services Limited and Mert Limited.14
Another example is Mr Bob Henricks, who was the Queensland secretary of the
ETU for a number of years. Until recently he was the chair of, or on the board
of, three separate funds in Queensland: Electricity Supply Industry
Superannuation Fund (Qld); The Allied Unions Superannuation Trust
(Queensland) and SPEC Super. 15
Yet another example is Michael Williamson, the former Health Services Union
boss in New South Wales, now facing a number of criminal charges.
Williamson was reported last year in the Sydney Morning Herald to earn a
$330,000 year salary, in addition to $150,000 from his various board positions
such as First State Super.16
When you dig into the legal arrangements underpinning industry
superannuation funds, you discover some interesting things. For example,
LUCRF Super, described in its annual report as “Australia’s first industry
fund”, has as its trustee a company called LUCRF Pty Ltd. The company has
issued two ordinary shares; one is held by Mr Charles Donnelly, the General
Secretary of the National Union of Workers, and one is held by Mr Timothy
Kennedy, the General President of the National Union of Workers.
This means that these two men have total control in appointing and removing
the directors of the trustee company. In other words, this fund, with $2.9 billion
under management, can be directed – on such matters as how it votes at the
D Crowe, ‘Super Funds Forced to Come Clean’, The Australian, April 27, 2012
SPEC Super, Annual Report, 2011; Energy Super Annual Report 2011; AUST(Q) Superannuation Annual
Report 2010–11. SPEC and Energy Super merged in 2011 and hence he is now on two boards. AUST(Q)
Superannuation Annual Report 2009–10, p 16.
16 K McClymont, HSU bosses berated for 'obscene' salary levels, Sydney Morning Herald, April 14 2012
14
15
8
AGMs of companies in which it holds shares – by these two senior officials of
the National Union of Workers. 17
Even more surprisingly, according to the company search these two men are the
beneficial owners of the shares – that is, they own them for themselves rather
than on trust for the union. At the very least that suggests that the ownership
arrangements of LUCRF are rather loose.
Union control has increased under Rudd Gillard Rudd Government
Under the Rudd Gillard Rudd Government, the entrenched position of unions in
the superannuation system has been systematically defended and extended.
Until recently, the responsible Minister was Bill Shorten, who held the dual
portfolios of Employment and Workplace Relations on the one hand, and
Superannuation and Financial Services on the other. This combination makes
perfect sense if you believe the union movement is seeking to leverage
compulsory superannuation to advance its economic interests and political
power.
Shorten was ideally suited to advance this agenda, as a former director of a
predecessor of Australian Super and a former secretary of the Australian
Workers’ Union. He is one of three former directors of Australian Super who
are presently federal Labor parliamentarians, along with Greg Combet and
Doug Cameron.
Labor’s candidate for the seat of Melbourne in 2010 and again in 2013, Cath
Bowtell, is also a former director of Australian Super. For most of the current
parliamentary term, she was warehoused in the role of Chief Executive of
another industry fund, AGEST.
17
ASIC Historical Extract, LUCRF Pty Ltd ACN 005 502 090 conducted 2 Dec 2011.
9
Shorten claimed that much of his policy agenda in superannuation was driven
by the recent Cooper Review into superannuation. However he appeared not to
read the chapter of the Cooper Review dealing with fund governance.
This chapter concluded that the equal representation system “no longer seems to
achieve its original stated objective”.18 It observed that directors are often not
elected but rather are nominated by third party organisations, such as employer
associations and trade unions –and in practice these organisations do not
necessarily represent all employers or employees.
It also pointed out that the system leaves significant groups ‘unrepresented’,
including most obviously those who are retired and receiving benefits payments
from the fund.
Based upon these findings, the Cooper Review recommended that the equal
representation model should no longer be mandated, and where it does apply at
least one third of representatives of both members and employers should be
non-associated.19 Bill Shorten simply ignored these recommendations.
This was not the only area where Shorten stoutly defended the interests of the
unions and union-linked superannuation funds against competitive pressure. He
also blocked recommendations by the Productivity Commission for changes to
the current arrangements which limit competition in the choice of default
superannuation funds.
Julia Gillard’s Fair Work Act 2009 established so-called ‘modern awards’ – and
one of the matters these cover is the specification of a ‘default superannuation
fund’.
18
19
Super System Review (Cooper Review), Final Report, Chapter 2, Trustee Governance, pp 53-54
Super System Review (Cooper Review), Final Report, Recommendations 2.6 and 2.7
10
Modern awards need the approval of the Fair Work Commission – an
organisation stacked with ex-union officials. So it is not surprising that modern
awards overwhelmingly specify industry and public sector funds as the default
superannuation fund.
An analysis conducted by the Institute of Public Affairs found that across 166
‘modern awards’, there were a total of 566 superannuation funds specified. Of
these, 513 were industry funds or public funds. 20
Following growing complaints, Labor was forced to include in its 2010 election
policy a promise to introduce an open, transparent and competitive process to
select default funds under modern awards.
The Productivity Commission was given the job of designing such a process. In
its draft report in June 2012, it found the default fund arrangements ‘could be
improved to promote the best interests of members’, that the primary objective
should be ‘the best interests of members’ and proposed that the selection of
funds should be ‘merit based.’ 21
The clear implication was that the existing process did not meet this test.
The Productivity Commission said that one option to improve the process
would be to establish a new body, independent of Fair Work Australia, to
‘select and assess the funds to be listed in modern awards.’22
Bill Shorten, alert to the threat to the union-linked funds, soon announced that
he wanted funds to be chosen by an expert panel within Fair Work Australia.23
Shorten’s model is now law: the expert panel will advise the Fair Work
L Staley, ‘Keeping Super Safe: A Call for Greater Transparency from Superannuation Funds,’ Institute of
Public Affairs, April 2010, p 11
21 Productivity Commission Draft Report: Default Superannuation Funds in Modern Awards, June 2012, p 2
22 Productivity Commission Draft Report: Default Superannuation Funds in Modern Awards, June 2012, p 2
23 Bill Shorten, Minister for Financial Services and Superannuation, Media Release No 052, 22/8/2012,
‘Government Supports Evidence Based and Expert Led Process for Default Funds.’
20
11
Commission (the renamed Fair Work Australia) on selecting default funds, but
the final decision will be made by the Full Bench of the FWC.
This is likely to mean that existing default funds will stay on the list in existing
modern awards; and given the conservative and legalistic nature of the process,
new and innovative funds are likely to have a hard time making it through the
two stage process. In other words, it is a very long way from the promised
open, competitive and transparent process.
As a case study in the way that the Rudd Gillard Rudd Government has
consistently worked to protect the interests of union linked superannuation
funds – even in the face of advice from an independent agency that the
arrangements were not in the best interests of those the superannuation system
is supposed to serve, namely members of funds – this episode is very telling.
Current arrangements raise serious policy concerns
I have spoken about the current structure of the superannuation market, the
dominance of union officials, and the assiduous efforts of the Rudd Gillard
Rudd Government to maintain and strengthen these arrangements. In the final
part of my remarks I want to argue that this raises serious policy concerns – and
touch on what the Coalition intends to do should we come to power.
Conflict of interest and duty (failure of sole purpose test)
The first problem is that union officials who are appointed to superannuation
boards potentially face a conflict between their duty to members of the
superannuation fund – and their interest in advancing the position of their union.
There are plenty of examples which raise concerns about such conflicts.
Recently, for example, we have seen pressure applied by the Victorian branch
of the CFMEU to building industry superannuation fund CBUS, following
12
an industrial dispute between the CFMEU and the construction company
Grocon.
In January this year, the Victorian secretary of the CFMEU, Mr John Setka, said
his members were angry that CBUS had awarded Grocon a $430 million project
in Sydney. 'I reckon it's a slap in the face for the union, what CBUS has done,'
Mr Setka was quoted as saying. 24
The CFMEU has subsequently sought expressions of interest from other
superannuation funds to become the default fund for its members. This would
appear to be an attempt by a union to use the economic resources of a large
superannuation fund over which it has substantial influence, including the right
to appoint three directors, to secure industrial or political outcomes, in this case
to advance its industrial dispute with Grocon.
What would such action mean for the interests of the 655,000 members of
CBUS? CBUS is pursuing a property development with a view to generating an
economic return on the funds it holds for the purpose of funding the retirement
incomes of members. It presumably chose Grocon as the builder offering the
best value for money on the job. Yet the CFMEU wants this consideration to
come second to its industrial agenda. How will the three directors of CBUS
appointed by the CFMEU deal with this?
Earlier I mentioned TWUSuper, a superannuation fund which has four officials
of the Transport Workers Union as its directors. In 2011 the TWU vigorously
attacked changes proposed by the management of Qantas to the operation of
that company, changes which management said would improve the company's
financial performance.
24
M Skulley, ‘CFMEU stirs up anti-CBUS campaign’, AFR, 7 Jan 2013
13
Members of TWUSuper have a right to expect that the sole consideration
exercising the minds of directors of the fund is how to maximise the financial
returns generated by the fund. This raises an obvious question: how do directors
of TWUSuper who are also union officials think about equity investments in
Qantas or in other companies in the transport sector?
In theory, the duty of a director of a superannuation fund in these circumstances
is clear. That duty is to ensure that the fund is maintained solely for the benefit
of each member of the fund. This is the sole purpose test, set out in section 62
of the Superannuation Industry (Supervision) Act. Considerations of union
interest – or personal interest – should be disregarded.
Whether that always happens is far from clear. Consider the Meat Industry
Employees' Superannuation Fund, which according to reports in The Australian,
made a $30 million investment in a building company, Austcorp. Almost all of
that money was lost when Austcorp collapsed in 2009.25
According to the report, Mr Wally Curran, a long-term secretary of the meat
workers union and a long-serving director on the board of the fund, was paid
significant consultancy fees by Austcorp. At the very least, this raises a question
about whether there was a conflict of interest facing Mr Curran.
Another example is in the July 2012 failure of the proposed merger between
Vision Super and Equip Super in Victoria. Vision Super has four directors
appointed by the Australian Services Union.
The merged entity was supposed to have elected directors. A member of the
Equip Super fund—somebody who happened to be a senior manager at a power
H Thomas, ‘Unionist Wally Curran took cash from developer amid $30m super investments’, The Australian,
May 18, 2012
25
14
company and a former employer-appointed director of Equip Super—chose to
seek election as a board member of the merged super fund.
This made the ASU very cross. In an email to ASU members, ASU state
secretary Brian Parkinson had this to say:
As expected, employers are seeking election to workers' positions.
Indeed, one such individual, John Azaris…has exploited his senior
management role to frustrate the election chances of ASU
candidates…Management will pull out all the stops to see one of their
own elected at the expense of workers.26
Mr Parkinson is a director of Vision Super. He has duties to the members of
that fund – and the transaction was conceived as being in the interests of those
members. Yet this email would suggest that his highest priority is political
advocacy as state secretary of the ASU.
Interestingly, just last month Vision Super pulled out of another proposed
merger with another fund.
Risk of cross-infection from union corruption
The recent governance scandal at the Health Services Union raises an even
more troubling possibility: the risk of a superannuation fund being crossinfected by corruption at a union because officials of that union are appointed to
the board of the fund.
Both the former national secretary of the HSU, Craig Thompson, and the former
NSW President of the HSU Michael Williamson, are the subject of criminal
charges relating to governance problems at the union. As is well known, Fair
26
A copy of the email was forwarded to me.
15
Work Australia found multiple breaches of union rules, including the misuse of
union credit cards for personal expenditure including on prostitutes.
Both men had previously been union appointed directors of superannuation
funds. Craig Thompson is a former director of HESTA, a fund with $20 billion
under management.
Michael Williamson was until 2012 a director of First State Super, a fund with
$33 billion under management for some 70,000 current and former NSW public
servants. He had been appointed to that position by Unions NSW. Last year
the chairman of First State Super complained that he had no power to remove
Williamson as a trustee.27
The HSU scandal is powerful evidence that at least one union had a serious
culture of corruption. In my view, it raises obvious questions about whether
there is a systemic risk in a system in which union officials are extensively
appointed as directors of superannuation funds.
This is precisely the sort of risk, I would suggest, that the governance reforms
recommended by the Cooper Review would help to address. Unfortunately, as I
have mentioned, Bill Shorten ignored the recommendations. He did offer the
comment, following the Fair Work Australia report into the HSU scandal, that
he was “appalled.”
I was reminded of Captain Reynaud in Casablanca who was ‘shocked’ to
discover there was gambling going on – and promised to ‘round up the usual
suspects.’
Long tail of small, sub-scale funds
27
S Patten, Super fund can’t sack HSU boss, Australian Financial Review, 11 April 2012
16
I spoke earlier about some of the very large industry funds like Australian
Super. At the other end of the scale, there is a long tail of small superannuation
funds. Let me mention for example:
 The Australian Meat Industry Superannuation Trust, with net assets of
$1.03 billion as at 30 June 2012
 The Health Industry Plan which had net assets of $621 million
 the Meat Industry Employees Superannuation Fund I mentioned earlier,
with net assets of $547 million
 The Allied Unions Superannuation Trust (Queensland) which had net
assets of $192 million
 The Transport Industry Superannuation Fund which had net assets of $86
million.
In fact, there are at least twenty industry and public sector funds with net assets
of less than a billion dollars. I make no criticism of the specific management of
the funds I have mentioned - and it is clearly possible for small funds to deliver
excellent performance.
But if you were designing a system from scratch you probably would not do it
this way – particularly if you were worried that small funds, closely linked to
individual unions, may be more vulnerable to governance problems than larger
funds.
One reason for this long tail of small funds is the close relationship between the
union movement and the superannuation sector. It suits key union officials for
their union to have a closely linked superannuation fund over which they can
exercise influence or control.
17
It is less clear that it best serves the interests of Australians who are saving for
their retirement.
Directors with little skill and experience who are there for the wrong reasons
Another question about the present arrangements is the nature of the directors
who are appointed by the unions. Most are union officials; they are generally
not people with extensive skill and experience in large scale financial asset
management.
In too many cases, they are there because a position as a director of a
superannuation fund is seen as reward for service to the union, or indeed as
simply an additional part of the role of being a union official.
In some of the troubling instances I have mentioned, it seems they are there
because they have sniffed out an opportunity to pick up some additional fees –
or even to improperly leverage the economic power of the superannuation fund
to facilitate their own personal advantage.
I think it is very problematic indeed that we have a system under which
employees are forced, by law, to take a portion of their remuneration in the form
of superannuation contributions, and yet we have not taken steps to derisk the
governance of the vehicles into which that money is put.
With the majority of people paying little attention to their superannuation, the
default fund arrangements mean that money is being streamed into a range of
funds – the size and governance quality of which is quite random from the point
of view of the individual employee.
Weakening of competition
Another problem with the current arrangements is that they weaken
competition. In my view this is a very serious issue.
18
It is well known that consumers do not always get good value for money from
their funds managers. The problem is compounded in a system where the funds
under management are rising strongly every year. Given the economies of scale
in funds management, a management expense ratio that may be reasonable
when a fund has $5 billion under management could be completely excessive
when it has ten times that amount.
So if we are forcing people by law to put a portion of their remuneration into
superannuation funds, we should pay particular care to ensuring strong
competition – as the best way to keeping fees under control.
Unfortunately, today’s arrangements protect large sectors of the industry from
competitive pressure.
The Productivity Commission’s report into default funds presents an amusing
series of arguments from industry funds and unions – including the SDU,
United Voice, CBUS, LG Super and the ACTU –explaining why competition
and contestability is a bad thing. 28
I felt like I was back in my Optus days, reading submissions from Telstra. The
Productivity Commission gave their arguments short thrift, concluding:
… enhancing contestability and providing incentives for funds to deliver improved
products are essential in ensuring that the interests of employees who derive their
default superannuation product in accordance with modern awards are best served. 29
Exercise of raw economic power
The final issue I want to discuss is the way that the union movement has used
the compulsory superannuation system to amass raw economic power.
28
Productivity Commission Final Report: Default Superannuation Funds in Modern Awards, October 2012, p
149-152
29 Productivity Commission Final Report: Default Superannuation Funds in Modern Awards, October 2012, p
153
19
Let me give some anecdotal examples. The chief executive of a major transport
company told me that when his company sits down to negotiate with the union,
one of the first demands is always that the union’s superannuation fund is
specified as the default fund in the award. With many issues to resolve, and
limited time, that is one demand which invariably gets conceded.
The chief executive of a large financial services company told me about the
power exercised by industry funds which award wholesale funds management
mandates to companies like his. Amongst other things, they are frequently very
specific in directing how the shares owned by the fund are to be voted at annual
general meetings.
It is not hard to see why unions might like to be able to influence and control
investment decisions affecting listed companies – and to use this power to
advance the industrial agenda of the union. Now it might be said that this
would never happen because it would breach the sole purpose test. In my view
such a statement would be naïve – and would fly in the face of the accumulated
evidence.
What the Coalition is going to do about it
Let me close by touching briefly on what the Coalition intends to do in this area.
We intend to implement some of key recommendations of the Cooper Review
ignored by the government:
 disclosure of conflicts of interests should be mandatory
 directors should disclose their remuneration in line with the provisions
that apply for publicly listed companies
 the equal representation model should no longer be compulsory
 where equal representation does apply, there should be at least one
third of directors on the board who are independent; and
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 directors who want to sit on multiple boards must demonstrate to
APRA that they don’t have any foreseeable conflicts of interest.
We will also work to ensure that Australians in default superannuation funds
can benefit from genuine choice and competition by ensuring any MySuper
product can compete freely in the default superannuation market.
Conclusion
I have argued today that when the compulsory superannuation system was
established by the Hawke Keating Labor Government and by the ACTU in the
early nineties, one of the key objectives was to increase the power and influence
of the union movement.
Upon coming to power in 2007, the Rudd Gillard Rudd Government began
working enthusiastically to further that agenda. The evidence is clear in the
number of union officials who are on the boards of superannuation funds; the
concentration of union control in the biggest funds; the substantial number of
directors appointed by the large unions and union peak bodies; and the growing
market share enjoyed by the industry and public sector funds, with their share of
contributions running well ahead of their share of existing assets.
The current arrangements raise a serious policy question. The question is not
whether it makes sense to have a system of retirement savings with an element
of compulsion – that is settled policy and the Coalition is clear in our support of
superannuation.
The question is whether key features of the present system are there because
they suit the union movement – even when they may not best serve the interests
of Australians saving for their retirement, the very people that the
superannuation system is supposedly designed to serve.
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I have argued today that the Rudd Gillard Rudd Government has failed to
address this issue - because key decision makers come from the union
movement and are personally committed to the agenda of using the
superannuation system to maximise the power and influence of the union
movement.
It is about time that superannuation policy was determined in the interests of
Australians saving for their retirement – and if the Coalition wins government
that will be our priority.
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