21/12/2011 - 11:14

Big industry funds must be more open

21/12/2011 - 11:14

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Industry funds must face up to questions over governance, transparency and accountability.

Industry funds must face up to questions over governance, transparency and accountability.

Regular readers of my column will know I am critical of the federal government’s stance on superannuation, especially the blatant favouritism towards industry funds which, in many cases, have a strong union connection.

My interest in this field was derived from reports dating back to 2008 on the proposed privatisation of GESB, the state government’s superannuation fund, which bore a strong resemblance to an industry fund.

One thing I learned from that experience was that governance and public disclosure in the superannuation field appeared weak compared to the public-listed sector where much of their investment dollars ended up.

Over the past few years, industry funds have spent millions (of members’ funds) advertising claims they are better performers than retail funds. 

Those cheeky claims, choosing conveniently short-term, boom-affected time frames to illustrate long-term investment performance, were not just about appealing to new members. They were also honing a political message for public consumption, so when union-backed Labor took power in Canberra it was easier to disguise the truth of many changes to laws affecting superannuation, which favoured industry funds and reduced competition.

Industry funds had the gall to criticise retail funds and independent financial planners for the transparency and scale of fees they charged. Their own faults were masked by the short-term over-performance of infrastructure investments (based on valuations rather than trading data) and few public checks and balances over their governance.

They are also, in my view, let down by mandated board positions, which tend to share most of the directorships between industry associations and unions. In many cases, the selection process is dubious, the value questionable and the conflicts obvious. 

That is all coming home to roost.

I have highlighted examples such as Western Australian-based Westscheme, which had some big investments in relatively illiquid CBD buildings and coal-fired power stations. It was taken over suddenly by AusSuper without any say from the members. Westscheme’s members did not even get a guaranteed board position in the merger.

Another big industry fund, MTAA Super, has had all sorts of strife this year with big questions around its performance and governance. Under pressure this year it conceded some ground, although the level of disclosure is limited compared to public companies – with its annual report simply showing the number of executives or directors paid with bands of $75,000.

The latest drama is at UniSuper, another industry fund which represents those who work in the academic field. It has been reported that changes made to one of its products, which were pushed through in 2006, removed responsibility of employers for meeting liabilities that might occur in its defined benefit scheme – where the superannuation payout is determined by final salary rather than market performance. How was this done?

From what I understand, more than 80,000 members now have doubts about whether the superannuation they were expecting can be delivered.

These examples don’t mean all industry funds are in trouble or badly run.

The issue I have is that it is hard to tell. Super funds, like other investors, like to bully listed companies over their disclosure but don’t feel so inclined to transparency when it comes to their own arrangements.

This is wrong. The industry is literally guaranteed billions of dollars a year because 9 per cent of salary is mandated to go into superannuation. Industry funds have elevated their ability to capture those funds by influencing superannuation policy, including default funds, which employers use when employees don’t nominate their own fund.

It is time that those holding sway over the future wealth of millions of people were a little more open about their activities.

A big year

I would like to end this column on a happier note and wish everyone a prosperous new year.

My guess is 2012 is going to be incredibly tough as Europe’s dramas spill over to the rest of the world.

WA has been largely immune from much of the global trouble due to the solid nature of resources investment and the work that has created.

This has not just been a reprieve for WA companies. From what I can tell, many local businesses have taken the lessons learned from the GFC to pare back debt and make themselves much leaner in an operational sense.

This is smart. 

No matter how wild the ride is next year, being financially healthy is safer than being bloated and overweight with debt and costs as many were when the GFC hit. 

And this discipline will hold them in good stead even if the world’s turmoil manages to miss again, even though I think that is unlikely.

Companies that are smart about how much they grow and what work they take on will be winners at the end of the next shake-out.

Federal industrial laws are an added complication, which is forcing up costs and reducing flexibility at the very time when Australia should be loosening such shackles on Australian business. There is little that can be done about that at this time, except avoid employing people where possible – an absurd situation for a Labor government to have created.

The other challenge will be funding. Australian banks are warning that credit will tighten as a result of what is happening in Europe. They are naturally resistant to passing on Reserve Bank rate cuts that don’t actually reduce their cost of money. 

Both sides of government need to be wary of bashing banks at a time when they need them to be robust. 

Capital markets might be a little better off. There is plenty of cash and the belief in the resources story over the longer term, with the proviso that no one invests if they know they can get it cheaper later.

That means a potentially rough time, especially at the most speculative end of the market – those without a track record of delivery.

But I do take solace in two oddly contrary thoughts.

Firstly, no matter how bad things are here, it will generally be more attractive to investors than other emerging markets. I don’t say that lightly. IR troubles and mining taxes are big issues but less so in troubled times; investors will take that pain in the short-term but their memories will be long and when things rebound they’ll make us pay for these bad policies.

Secondly, our miners are well placed to find the gems outside Australia, which are likely to surface cheaply in troubled times. Volatility and uncertainty always favour those with knowledge and expertise. 

In West Perth a collective knowledge bank worth billions has developed, unaided by governments that cannot artificially create such hubs no matter how much they try.

As Europe gets into trouble and withdraws capital from risky markets like Africa for safer investments, it is with some irony that I see such funds destined for Australian resources, only to find a home in West Perth companies picking the eyes out of offshore destinations.

Perhaps that is like having a bet both ways but I see the geographic diversification of our resources sector and the growing recognition of its skills set in a commodities-hungry world as additional insurance for our state if the global economic situation deteriorates significantly during the next 12 months.

• mark.pownall@wabn.com.au

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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