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John Edstein
Partner
John Edstein
Partner
T +61 2 9296 2129
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In May this year, the Federal Government announced a wide-ranging review of the superannuation system, covering governance, efficiency, structure and operation, including both compulsory and voluntary aspects. Combined with the Henry Review into Australia’s future tax system, which includes the taxation of superannuation, it is fair to say that superannuation is in the melting pot…again.
Many would argue the constant tinkering with the system undermines the confidence that Australians have in the system and their willingness to participate in it. There is force in this argument, particularly in the effect on voluntary superannuation.
The Government seems to acknowledge this point but is undeterred in its pursuit of wide-ranging reviews. In the case of the tax review, it is only about two years since the major reform of the tax system for superannuation, which started on 1 July 2007 and which the Government apparently supported in the lead up to the last election.
With approximately $1.1 trillion worth of assets in Australia’s superannuation funds, superannuation is a major source of funds for Australia’s stock markets, institutional property markets, infrastructure projects, funds management and life insurance industries and capital markets generally. Accordingly, the reviews should be of interest to all persons connected with the financial services industry.
The Cooper program
The “Super System Review”, as it has been officially called, is headed by Jeremy Cooper, a former Deputy Chair of ASIC. The Committee comprises seven part-time members: Kevin Casey, Greg Evans, Sandy Grant, Dr David Gruen, Meg Heffron, Ian Martin and Brian Wilson.
The Review is scheduled to report to the Government by 30 June 2010 and has released its work program which may be summarised as follows:
As the table indicates, submissions on “Governance” closed last Friday, 16 October, the day that the second Issues Paper was released. All materials released by the Review, including submissions, can be found at www.supersystemreview.gov.au.
Governance
The Issues Paper on “Governance” is largely framed as a collection of questions under several headings: “General”, “Trustees”, “Government and regulatory”, “Accountability to members” and “Operational”. At a high level, they may be characterised as targeting certain core legal questions and a wide range of questions around prudential settings in relation to structure. The questions around prudential settings provide plenty of material for discussion and debate from all interested participants in the industry.
The same can be said of the core legal questions but with the prospect that the view of the legal profession carries relatively greater significance. The legal profession is particularly well placed to respond to the following three questions (paraphrased from the Issues Paper):
- Is the trust structure still the appropriate model upon which to build the regulatory regime?
- Would codification of certain duties of trustees have a significant impact on trustee governance?
- Are super funds, individually or as a class, sufficiently accountable to members?
The first of the above questions is, arguably, the core question of the entire Review. If the Review recommends a move away from the trust structure and that recommendation is adopted by the Government, it would herald a replacement of the existing regime, with all manner of legal, regulatory, legislative, administrative and tax consequences (to name but a few!).
Is the trust structure still appropriate?
In my opinion, yes, for a range of reasons:
- As a common law country, the trust relationship is the natural home for governing a situation where one person holds assets for the benefit of some other person or persons. The starting point for the development of modern trust law is often attributed to the enactment of the Statute of Uses in England in 1535. Accordingly, trust law has over 400 years of rich history and refinement through the courts.
- Within that history, trust and equity law was developed by the courts as a body of law to overcome or work around the strict rules of contract law and property law. Equity is based on fairness, morality, flexibility and equity. Those principles sit well as foundation principles upon which to build the superannuation system.
- Any alternative would likely be a scheme constructed by statute and possibly contractually based. As such, it would potentially be limited by the lack of case law to assist in the interpretation of it and its breadth of legal principle would be unlikely to be as wide ranging as trust law.
- The regulatory history of superannuation includes an acknowledged dependence on the trust relationship, particularly the SIS regime.
- Over the past 20 years or so, many statute based public sector schemes, under which funds were maintained according to statutory provisions, adopted the trust model as a more robust means of imposing duties upon the entities charged with holding and managing the fund assets.
- Other common law countries have the trust relationship as the base model for pension/superannuation systems: the United Kingdom, Canada and New Zealand.
The key point is that the trust is the ideal structure upon which to build the regulatory regime. Most importantly, the trust structure is highly flexible, leaving open the ability for the regulatory regime to be moulded onto it.
A trustee’s duty of care and the no conflict rule are central in support of this view. A trustee’s duty of care is based on principles of morality and the no conflict duty is based on avoiding failings in human nature. These duties are not simply throw-away lines but are concepts developed by clever and astute judges over a great many years to hold persons accountable where those persons look after property for the benefit of others.
Trustee duties…would codification have a significant impact?
By codification, it seems that the Committee is referring to the setting down of duties in express provisions in a statute, where those provisions would operate to the exclusion of duties that might have otherwise applied under the general law.
It would be inappropriate to try to state, in a single set of statutory provisions, what the general law has taken over 400 years to develop. While the suggestion to codify might be prompted by well-intentioned objectives of simplicity and certainty, the result would almost certainly be the opposite. In particular, a new statutory formulation of duties means that there would be no jurisprudence around the meaning of those duties. It could take years to develop relevant jurisprudence, noting that the duties of a trustee cannot be so simply expressed in a single set of words that could cover all situations. The duties are much more explained by example, with those examples being the volumes of case law that have shaped, developed and fine tuned the duties into a coherent body of law.
SIS itself is an example of this. In section 52(2)(c), a trustee has a duty to act in the best interests of beneficiaries. There has been much debate and academic attention given to this apparently simple expression, which many use as a by line for a trustee’s base duty. Under the general law, it reflects the duty of loyalty owed by a fiduciary. Noting that a trustee is a fiduciary, the concept is essentially applied as a proscriptive test (prohibiting conflicts of interest and unauthorised profits). However, by being expressed in the statute, many have mused as to whether it is a prescriptive test, a position apparently favoured by APRA, leading to seemingly impossible situations in practice.
Are super funds sufficiently accountable to members?
Members do have a measure of proactive rights in the form of their ability to seek information and take action through complaints, reporting to regulators and redress through the courts. However, this measure is only modestly effective because the average member does not have the education, inclination or financial resources to pursue these avenues on their own behalf.
The primary means by which accountability is engaged for members is through the wide-ranging disclosure regime. Clearly this is important. However, the debate continues as to what quantity and quality of disclosure is most appropriate. Query whether this debate will ever subside. There are strong arguments, based on the observation that superannuation is so complex, that superannuation needs to be individually explained to people rather than expressed in reading material of whatever length and insight.
Given these shortcomings, there is scope to explore alternatives that would give members greater proactive oversight. This could complement the proactive oversight of the regulators. There are various models that might be considered in this respect. What those models might be, and the advantages and disadvantages of any model, would require wide-ranging discussion. From the form of the questions posed by the Committee, it seems that there will be no hiding from that discussion and that some form of new system is likely.
Some predictions
Based on what we have to date, my predictions are as follows:
- Some fundamental reshaping of the existing regime
- Reshaping of regulatory objectives
- Trust as the primary vehicle
- Heightened oversight and accountability.