Governance of superannuation funds

Recommendation 13

Mandate a majority of independent directors on the board of corporate trustees of public offer superannuation funds, including an independent chair; align the director penalty regime with managed investment schemes; and strengthen the conflict of interest requirements.


Government should amend the Superannuation Industry (Supervision) Act 1993 to mandate that public offer APRA-regulated superannuation funds have a majority of independent directors on their trustee boards. The chair should also be independent. An arm’s length definition of independence should apply.

Government should introduce civil and criminal penalties for directors who fail to execute their responsibility to act in the best interests of members, or who use their position to further their or others’ interests to the detriment of members.

To ensure effective arrangements for dealing with conflicts of interest, each director’s interests should be deemed to have been disclosed only when they have been acknowledged by all other directors.


  • Improve the governance of public offer superannuation funds, thereby protecting the best interests of members.
  • Align the governance requirements and penalty regime for superannuation directors with those applying to directors of responsible entities of MISs.


Problem the recommendation seeks to address

Although there is little empirical evidence about the relationship between quality of governance in Australian superannuation funds and their performance, high-quality governance is essential to organisational performance. Some overseas research suggests that good governance adds one percentage point to pension fund returns.91 The governance framework for Australian superannuation funds has shortcomings that are inconsistent with good governance principles and, in the Inquiry’s view, need to be addressed.

Including independent directors on boards is consistent with international best practice on corporate governance. Independent directors improve decision making by bringing an objective perspective to issues the board considers. They also hold other directors accountable for their conduct, particularly in relation to conflicts of interest.92

At present, independent directors are not required on the boards of public offer superannuation entities. Some superannuation trustee boards have independent directors but others do not. A recent survey by Mercer found that 11 out of 19 funds without independent directors would not make changes to their board structure. Of the remaining eight funds, five said they would only appoint independent directors if it were mandated.93

APRA recently issued prudential standards to improve the governance of superannuation trustee boards and the way in which these boards prevent conflicts of interest from influencing decisions.94 However, structural requirements for the superannuation trustee boards are not aligned to other entities that manage funds on behalf of others, such as MISs. MISs must have either a majority of independent directors on the board of the responsible entity of the scheme, or a majority of independent members on their compliance committees.95 The requirements for superannuation funds are also inconsistent with governance requirements for many of the entities they invest in, even though governance theory suggests that these requirements should be aligned.96 Under the ASX Corporate Governance Principles, entities listed on the Australian Securities Exchange (ASX) are required to have a majority of independent directors on an “if not, why not” basis.97

The Super System Review recommended that at least one-third of board members should be independent on those boards with equal representation (with the remainder of positions equally split between employer and employee representatives), and a majority should be independent on all other boards.98 This would improve the current standards, but if independent directors are to have an effective influence on board decisions, all superannuation funds need a majority of independent directors.

In defined benefit schemes sponsored by a single employer, equal representation of employees and employers is appropriate and consistent with the governance models of defined benefit pension funds internationally. These funds would continue to operate using the structure for which equal representation was designed, with the employer bearing the financial risk from the board’s decisions.

The equal representation model has less relevance in the current superannuation system, which predominantly consists of public offer DC funds and funds less focused on a single employer. As more fund members exercise choice, directors appointed by employer and employee groups are less likely to represent the broader membership of public offer funds (see Recommendation 12: Choice of fund). Given the diversity of fund membership, it is more important for directors to be independent, skilled and accountable than representative.

As part of Government’s recent consultation process on reforms to superannuation fund governance, some stakeholders argued against mandating independent directors on superannuation boards.99 The main arguments opposing the proposal were that appointing independent directors should be at the discretion of the fund based on its particular circumstances and needs, and that those funds using the equal representation model have generated higher returns than other funds in recent years. However, there is no evidence to suggest that the performance of these funds is driven by their equal representation model.

At present, superannuation directors are not subject to criminal or civil penalties in relation to their duty to act in the best interests of members. A member who has incurred loss or damage as a result of director misconduct can seek recovery through civil action — or APRA can disqualify the director. This is inconsistent with the regime applying to the directors of responsible entities of MISs under the Corporations Act 2001, who are subject to criminal and civil penalties.100 The absence of criminal and civil penalties in relation to misconduct by superannuation directors represents a significant gap in the current framework.

APRA Prudential Standard SPS 521 includes a requirement to maintain a register of director interests. Although these requirements are broadly appropriate, conflict of interest requirements need to be particularly strong for superannuation funds because there is a trustee relationship between the fund and members, and most members are required by law to participate in the superannuation system. The requirements could be strengthened by specifying that each board member must acknowledge when a director adds an interest to the register. This would focus the attention of the board on director interests and ensure a rigorous oversight process.

Some submissions are concerned that this requirement would expand boards and increase costs to members. If superannuation fund boards expand to accommodate more independent directors, boards should justify to their members and APRA why such an expansion is required for the fund’s proper governance and operation.

The need to strengthen superannuation funds’ governance is particularly important given that members lack the power to remove directors who breach their duties. In MISs, unit-holders typically do not have rights to appoint or remove directors, but they do have the right to vote to replace the responsible entity managing their funds. Members in superannuation funds have no rights in this regard.


Requiring a majority of independent directors, with an independent chair, would strengthen the governance of superannuation funds. The Inquiry is not convinced by arguments that independent directors would have a negative effect on superannuation returns.

Strengthening disclosure arrangements and introducing civil and criminal penalties for director misconduct would increase the incentive for all directors to act in the best interests of superannuation fund members.

The Inquiry notes that directors of life insurance companies are not subject to civil and criminal penalties for breaching their duties to policy holders. Government should consider whether there is a case for also aligning the penalties applying to life insurance directors with those applying to MIS directors.

91 Ambachtsheer, K 2007, Pension Revolution: A Solution to the Pensions Crisis, John Wiley & Sons, Hoboken, page 130.

92 Organisation for Economic Co-operation and Development (OECD) 2004, OECD Principles of Corporate Governance, OECD, Paris, pages 64–65.

93 Mercer 2014, Super funds under-prepared for independent directors and increasing scrutiny, media release, 22 July, Melbourne, viewed 7 November 2014.

94 Australian Prudential Regulation Authority (APRA) 2012, Prudential Standard SPS 510: Governance, APRA, Sydney; APRA 2013, Prudential Standard SPS 521: Conflicts of Interest, APRA, Sydney.

95 Corporations Act 2001, s601JA and s601JB.

96 Ambachtsheer, K 2007, Pension Revolution: A Solution to the Pensions Crisis, John Wiley & Sons, Hoboken, page 41.

97 ASX Corporate Governance Council 2014, Corporate Governance Principles and Recommendations: 3rd Edition, Recommendation 2.4, ASX Corporate Governance Council, Sydney, page 17.

98 Commonwealth of Australia 2010, Super System Review Final Report, Part Two: Recommendation Packages, Recommendation 2.7, Canberra, page 56.

99 For example, the submission by Industry Super Australia suggests placing a positive obligation on funds to consider making up to one-third of the directors on their board independent directors. Industry Super Australia 2014, In members’ best interests: ISA submission to Government discussion paper, Industry Super Australia, Sydney, page 12.

100 Corporations Act 2001, s601FD and Part 2D.1.