Australia’s superannuation regulator has written to Australian superannuation funds^[1] raising concerns their spending might not be benefiting members.

The Australian Prudential Regulation Authority is not just concerned with the type of expenses, but with the corporate governance around their approval, evaluation and reporting.

The letter refers to a “lack of robust governance and oversight of fund expenditure” and funds making “decisions not supported by an expenditure management framework”.

Concern about funds’ spending and governance has grown since construction industry super fund, CBUS, last year admitted it spent A$387,000 of members’ retirement savings^[2] on a 40th birthday bash attended by 750 guests.

At the same time the fund was being criticised for its links with the Construction, Forestry, Maritime Employees Union as three of its board members were members. The union was alleged to have been infiltrated by criminal elements^[3].

Protecting members

Since July 1 2021, legislation requires regulated superannuation funds – industry and retail funds, but not self-managed funds – to act in the best financial interests of their members. This is referred to as their “best financial interest duty^[4]”.

In the superannuation industry, what economists call the principal-agent problem – in this case, ensuring super fund trustees (agents) protect the financial interests of members (principals) whose retirement savings they manage – is particularly acute.

Compared to public company shareholders, for example, super fund members have little opportunity to monitor and challenge management decisions. This includes spending decisions that affect their super balance. There is no annual general meeting at which members can vote or question their fund’s trustees.

Fund members also cannot rely to the same extent as shareholders on the market to optimise the performance of management. The threat of takeover and replacement of executives tends to be lower than for publicly listed companies. Apart from switching funds, the regulator’s oversight and enforcement are the main protection for members against trustee maladministration or malfeasance.

There is also a significant public interest in ensuring each super fund meets its financial duty obligations. The squandering of a member’s retirement savings increases the likelihood they will need to rely on the public pension, a cost for all taxpayers.

Can super fund expenses be justified?

It has been reported that spending under the regulator’s microscope includes “sports sponsorships, travel, conferences and other payments to affiliated unions or employer groups^[5]”.

Whether or not such expenses are compatible with members’ best financial interests is often difficult to judge. That is why funds are being asked to report and justify expenses more transparently.

For example, a fund’s spending on marketing and travel might be consistent with best financial interest duty if there is scope associated with increased membership and funds under management.

There are significant fixed administration and regulatory costs associated with running a super fund.

Core customer service functions, such as processing death benefit claims^[6], require sensitive (and expensive) handling.

Spreading such costs over more members likely helps reduce fees charged to members^[7] and can encourage investment in improved customer service^[8].

Large super funds are increasingly investing in alternative assets such as private equity and taking direct stakes in bespoke projects (such as airport ownership^[9] and apartment construction^[10]). While such investments can enhance returns, they usually require access to significant financial firepower.

Bigger may not always be better

In short, if size matters, and if, for example, sports sponsorship^[11] allows super funds to grow cost-effectively, then marketing and travel expenses may be compatible with best financial interest requirements. That might even include an executive’s travel to the AFL Grand Final to network with potential co-investors.

Neverthless, there may also be disadvantages associated with increased fund size. Larger funds are likely to find it harder to outperform the market and their peers, at least when investing in listed equities. So spending to grow membership may not always be in members’ interests.

Whether super fund payments to affiliated unions or employer groups are justifiable is complicated by legislative requirements^[12]. While a fund cannot give benefits to an employer or union, it can give benefits to a firm’s employees or a union’s members. This might include preferential death benefits or financial literacy seminars.

Questionable expenses

Some fund expenses might reflect the pursuit of “private benefits” by super fund executives or trustees. They might, for example, approve questionable investments that burnish their CVs for their next corporate gig. Or they might approve sponsorship of a football team so they can network with potential future employers or business partners at a game.

More innocently, but no less perniciously, the executive remuneration consultants super funds hire may define key performance indicators that are inappropriate for super fund executives (for example, membership growth at all costs).

What can the regulator do?

The superannuation regulator has broad powers to license and supervise superannuation funds to ensure they “keep the financial promises^[13]” made to their members.

Ultimately, a fund’s trustees are responsible for ensuring the fund is meeting its financial interests obligations.

One tool at the regulator’s disposal is to seek a court enforceable undertaking^[14] from an offending fund. This is a legal promise to address governance and legislative breaches. Failure to deliver can jeopardise a fund’s licence to operate.

Ultimately, the legal burden of proof in any civil legal action^[15] to show they have met their best financial interests responsibilities, now lies with the trustees.

Now the Prudential Regulation Authority has put super funds on notice to lift their game.

References

1. ^{^} has written to Australian superannuation funds (www.apra.gov.au)
2. ^{^} A$387,000 of members’ retirement savings (www.afr.com)
3. ^{^} alleged to have been infiltrated by criminal elements (www.9news.com.au)
4. ^{^} best financial interest duty (treasury.gov.au)
5. ^{^} sports sponsorships, travel, conferences and other payments to affiliated unions or employer groups (www.afr.com)
6. ^{^} processing death benefit claims (www.investmentmagazine.com.au)
7. ^{^} reduce fees charged to members (www.apra.gov.au)
8. ^{^} improved customer service (theconexusinstitute.org.au)
9. ^{^} airport ownership (www.afr.com)
10. ^{^} apartment construction (www.afr.com)
11. ^{^} sports sponsorship (www.afr.com)
12. ^{^} legislative requirements (www.ato.gov.au)
13. ^{^} keep the financial promises (www.apra.gov.au)
14. ^{^} court enforceable undertaking (www.apra.gov.au)
15. ^{^} legal burden of proof in any civil legal action (treasury.gov.au)