Ken Phillips - Article in The Australian - Labor shuns transparency for super or for unions

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The Australian

Labor shuns transparency for super or for unions

17 October 2011

Every Australian with money in a big superannuation fund should be concerned about what's happening to their retirement nest egg. They should be worried for one reason: funds don't fully disclose what they're doing with the money. This would probably surprise most Australians.

There's more than $1 trillion sitting in superannuation funds. More than half is with the big funds. About $230 billion is in 67 industry funds. These are run and controlled by partnerships of unions and employer association. Another $350-plus billion is in 154 retail funds operated by large concerns, such as AMP.

What's significant with these big funds is that the Australians with money in them have no control over how the money is used. Instead, small numbers of individuals control these billions. For example it's been identified that just 12 people hold directorships or executive positions where they control $188bn of industry fund assets.

Superannuation is compulsory. It should be expected that total disclosure and transparency by the people who control the funds is required at law. Yet this is not the case. To a large degree the system operates on "trust us!"

Some Australian super funds voluntarily disclose a fair bit, but none to an international standard. Others have close to zero disclosure. The industry (union) funds have the lowest levels of disclosure by a big margin compared with retail funds.

Australian funds compare badly with overseas funds. One of the largest superannuation funds in the world is CalPERS. With more than $US200bn ($193bn) in deposits, it manages superannuation for California's public sector employees. Go into the CalPERS website and it's possible to find almost anything about what's happening to CalPERS money.

There are extensive listings of every shareholding at purchase and current price. The same applies to all property holdings and so on. On the expenses side, almost nothing is undisclosed. Even the cost of airfares and accommodation for the CalPERS chairman to attend conferences is displayed. Is any of this level of disclosure required of Australia's superannuation funds? No. The law requires none of this.

Last year the federal Labor government received the recommendations from the most sweeping review of superannuation yet undertaken. The Cooper review called for significant requirements of disclosure to be imposed on the superannuation funds. Labor's response has been to sweep aside hardcore disclosure requirements.

Take these examples.

Cooper said that a standardised disclosure format should be developed showing gross investment returns, costs and taxes and the number of quarters of negative investment returns. Investment option performance tables should be easily accessible on fund's websites. Funds should be required to disclose their complete portfolio holdings on a six-monthly basis. The list goes on.

Overall, wherever the recommendations pushed for the compulsory disclosure of hard information the government has said it "supports improved disclosure requirements but will consult with relevant stakeholders on design and implementation issues." This sounds like delay and a brush-off.

Total transparency of superannuation funds' activities and outcomes is central to the integrity of the system and workers' confidence in it. The Cooper recommendations called for what is done overseas and what happens in most non-superannuation funds in Australia.

But in the superannuation reforms recently announced by Assistant Treasurer Bill Shorten, the only new disclosure requirement is for the voting behaviour of trustees to be declared on fund websites. That's inadequate for proper transparency.

Why would a Labor government not immediately require of the funds compulsory disclosure to the highest levels? The Cooper review recommended this. The funds should meet international standards. The billions in the funds do not belong to the small numbers of individuals who control and run them. The money belongs to the workers. Labor is supposed to protect workers!

It's hard to avoid a suspicion that Labor culture and practice has something against disclosure. Look at what happens inside unions. Unions collect somewhere around a billion dollars in worker dues each year. What's the level of disclosure there? Again, like the superannuation funds, it's inadequate.

If disclosure is poor the risk of misappropriation of monies is high. Allegations that the ex-leader of the Health Services Union paid for prostitutes with union funds is an example. Sometimes people in positions of power will do the wrong thing if they think there's a low risk of being caught. High transparency and disclosure is an essential safeguard against this. Australian workers deserve this safeguard.

Superannuation funds should have forced on them levels of transparency and disclosure that exceed that required of publicly listed corporations. The Cooper review provided the government with a template for action. They should activate superannuation fund transparency immediately.

From the The Australian, October 2011.

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Submitted Comments

An insider's story of a superannuation fund:

Dear Ken,
After reading you great article in today's Australian I have to tell you this story.

I was elected to the Melbourne City Council in 1989. Councillors are drafted on to various Committees after the first meeting. I was drafted on to the Super Fund Committee. The members of the committee were 2 union reps---one a gardener and the other a welder with no financial experience---a woman councillor who had property interests, the CEO and myself. My predecessor was Julian McGaruan---former Senator. Apparently he had not attended any meetings of the Super Fund for quite a while. Also a Council employee whose job was to oversee the investments---he was also a union shop steward.

The investments in the Council super fund were all controlled by an ANZ Bank subsidiary.

At the first meeting I attended in late 1989 the head of the ANZ subsidiary reported that the fund had lost 25% of its assets as a result of the stock market crash in the previous 12 months---there had been approximately $30 plus million in the fund. As the fund provided fixed defined benefits to employees, the Council was obliged to add $700,000 to the next budget to support the fund (and future budgets).

It appeared that nobody on the committee had any idea that there had been such a terrible loss, including the CEO and the employee supervisor.

The committee decided to remove the control of the investments from the ANZ Bank mob and chose 2 new investment companies to carry on.

I complained strongly about the performance of the ANZ mob and as a result a Melbourne University person was contracted to examine the performance of the ANZ mob. The report came back that the ANZ mob had turned over the whole of the fund 3 times in the previous 12 months, including investing in all sorts of overseas shares and including $5 million at one time in Christopher SkaseÕs company which eventually went broke---the name escapes me now. However, they did not actually lose much in this investment. The MU contractor recommended that the investments should be restricted to the top 200 companies on the Stock Exchange. The ANZ mob had been trading the portfolio and obtaining commissions from new issues for themselves.

Further advice was obtained from the Council solicitors as to what action could be taken against the ANZ mob's performance. The advice was that any legal action would be unlikely to be successful because the responsibility of the Melbourne City Council was that it should have been regularly checking and supervising the investment programme. The Council committee and the shop steward employee did not know what had been happening. QED

My introduction to a Council Committee. By the way, the ANZ mob also handled all the investments for the MMBW who also lost heaps. The ANZ mob lost all their business. Some justice?

Regards
MichaelM

This story is not specifically about superannuation funds but is highly cautionary:

Hello Ken,
Please caution your members to avoid complacency in any potential bank insolvency.

I have bitter memories of the Bank of Credit and Commerce collapse when I was working in Hong Kong in 1991. I had money in accounts there because BCC offered an attractive interest rate on deposits and were accommodating about letters of credit for small enterprises. Then a bank-run started on rumours that Bank of England would do something about the BCC.

On the Friday before the eventual collapse, the Hong Kong government made radio announcements calling for calm and reassuring depositors of the solvency of BCC.

I understand that the HK government made the unprecedented move of opening the interbank exchange over the weekend, specifically to clear all cheques drawn on BCC and made to the HK Government.

Then the rug was pulled out from under BCC at the opening of business on Monday.

It was a bitter lesson to trusting individuals and small business. We lost almost everything in that collapse. And it was a salutary lesson in "never trust government".

So if anyone has deposits in banks at risk, act today to get the money to a safe bank in a safe haven.

And for those depositors who have parked money offshore for dubious purpose, it could be that your time is up.

Cheers,
JohnF

And currently?:

Here's the infighting in one union over control of superannuation funds.

On 17 October, Vince commented:

Mr Ken Phillips,
So pleased with your article today in the Australian and the reference to calPERS comprehensive disclosures re Superannuation investments. I have a reasonable portfolio but have resorted to using my own judgement and some trading in options rather than being mystified by my previous Managed Fund operations.

Could I respectfully suggest you encourage the Liberal Party to take your suggestions on board for the next Government? Address your contribution to a policymaker direct. Even though Mr Shorten has moved in a reasonable direction the Libs could make political capital by improving on actions and adopting a more "progressive" stance by instituting your suggestions.

End result: A plus for us retirees Super and a plus for Libs re "progressive" policies plus a further reason for senior execs to be accountable.

Thanks

On 18 October, Gary commented:

Dear Mr Phillips,
Congratulations on your stand on this overdue reform. My own recent experience highlights the potential difficulties an ill informed client base suffer as a result of this failure of policy which stems from a philosophical failure to accept that super is the client's deferred earnings not a plaything for traders and governments.

I have recently been in a dialogue with my large industry fund over their investments in their "Cash" option. Most retirees particularly those invested in "capital stable" or "moderate risk" fund options also are heavily invested in "Cash". The pure "Cash" option is typically used by retirees wanting a steady income stream and what my provider describes on its web site as "next to no risk".

However apart from this assurance my fund's web site divulges nothing as to the disposition of their investments beyond the fact that they invest in cash and bank bills. In answer to my enquiry I discovered I was exposed to the subsidiary of two foreign banks - one European - which are considered by AFMA as Prime Banks. The European bank has been widely reported as having significant problems in raising short term funds and according to Credit Suisse will require recapitalisation in the order of $14 billion euros in part because of its Eurozone debt exposure.

My provider on my querying the safety of their strategy resorted to the view that the European leaders would do " whatever it takes" to save the bank in question. The complexities of the Maastricht treaty, the quantum of the debt problem and whether an Australian subsidiary would be covered by any European recapitalisation were viewed by them as speculation.

Now, to be fair, armed with this knowledge I am free to set up an SMSF or seek an industry fund that restricts its investment to Australian Prime Banks where the Government and the RBA have the ammunition to secure their future. However, I wonder how many ordinary retirees realise their security in retirement is, in part, hostage to 17 European governments who have a poor history of avoiding World War let alone a debt crisis.

Regards