A deep-dive discussion on conflicts of interest and financial outcomes in the best interests' duty arena.
By Lachlan Colquhoun
Members of superannuation funds may have strong beliefs on political and social issues and trustees may have links to third party organisations, but superannuation fund trustees should be narrowly focused on the financial performance of the fund.
This was the consensus from an FSC Summit panel discussion on Best Interests’ Duty in Superannuation, where panellists discussed how conflicts of interest could undermine financial outcomes.
Andrew Fairley, the chair of EquipSuper, said he believed the aborted merger between his fund and Energy Super had failed over issues of best interest.
It was documented in the Hayne Royal Commission that Energy Super claimed that the merger failed because Fairley had refused to have union nominees on the board of the merged fund, but Fairley told the Summit that the case showed that the interests of trustees – and their goal on the best financial outcome for members – could be in conflict with the interests of shareholders.
“Hayne said that the shareholders of the trustee company don’t share that best interest duty with the trustee,” said Fairley.
"The trustee does but the shareholder doesn’t, and there may be circumstances where the shareholder doesn’t exercise discretion and a trustee may need to make a decision on what do to.”
“He (Commissioner Hayne) refused to extend the best interest duty down to the shareholder, but put the weight on the shareholders to say ‘you need to take into account what the directors you are appointing are saying.’”
Best interest had always been interpreted as the pursuit of the best financial interest for members, Fairley said, but some practices – such as offering frequent flyer points or health apps to members – were the beginnings of a “slippery slope” which could confuse and undermine best interest because it widened the definition away from financial outcomes.
He called on regulators to strongly clarify that “best interest” referred narrowly to financial outcomes, because without this clarification the industry would still be riven with conflicts of interest.
Fairley also said that best interest outcomes were often related to the remuneration practices of funds.
“It is clear that poor remuneration practices drive bad outcomes and that has been evident from much of the (Royal Commission) evidence.
“So it think it behoves trustees to give consideration to whether STI (Short Term Incentive) and LTI (Long Term Incentive) models of remuneration are appropriate to super.”
Panel member Senator Andrew Bragg, a Liberal Senator for NSW, said that while it would be “dangerous territory” for him as a policy maker to interpret the best interest duty the Royal Commission had shown a “multitude of examples” of conflict of interest.
“Whether is was 200,000 people having accounts skimmed, or whether it was third parties encouraging particular funds to take action against BHP, there have been a whole range of conflict around trustees and the trustee office,” Senator Bragg said.
He said the extension of the BEAR (Banking Executive Accountability Regime) to superannuation executives trustees would lead to a “sharpening of minds” on this issue, and put beyond doubt that everyone in the super industry should be working to maximise retirement outcomes.
Victoria Weekes, the Chair of OnePath Custodians, was asked about climate change and her views on whether an investment strategy focused on ESG principles was consistent with “best interest” or deviated from it.
Weekes said that it was “very risky” to pick individual factors, such as climate change or investing in tobacco companies out of a wider ESG framework, but made the point that the “G” in ESG referred to “governance.”
“The thing for me about ESG is what is it about the things you invest in terms of their risk and financial performance, and increasingly we are getting better measures of performance,” Weekes said.
“To the extent that ESG factors fit into organisational performance and are part of a risk assessment they should be taken into account.
“I think it will become easier for trustees to factor in ESG into performance when the measures are better integrated into financial performance, and all of that has to come back and have a connection to the purpose of superannuation.”