In this month’s ACTU Super Newsletter: Choice on the doorstep; Australia aging population and the interface between health and retiremnt income systems; ACSI report – termination payments for executives; CMSF round-up; ACTU Super Trustees Forum; Editorial change at ACTU Super.

Choice on our doorstep

With the choice of fund regime effective 1 July, the government has released
its choice of fund regulations.

The regulations address the minimum level of death insurance which must be
offered for a superannuation fund to qualify as a default fund, the information
an employee must provide to their employer when exercising choice and the
standard choice form.

While the two-page form is a significant improvement upon the original draft,
it remains a fairly complex document.

An employee seeking to exercise choice must provide their employer with the
name of the fund, the fund ABN, and superannuation product identification number
(SPIN), plus a letter from the fund trustee verifying that the fund is a
complying fund, that they will accept contributions from the employer and
providing details about how the employer should make contributions.

In a win for industry funds, employers will be required to identify both the
default fund and, where this is not the current fund, employers will also be
required to identify the current fund to which contributions are made.
Employees wanting to remain with their current fund will not need to provide
details of their current fund, but can simply elect to remain with their current

Copies of the form are on the ATO website.

The minimum level of death cover required to qualify as a complying fund is
cover at a premium of 50 cents per week for most members (under 56 years)

There are a number of exemptions. Employers can continue to contribute to
non-complying funds for a period of 3 years. Contributions made under a federal
award will satisfy the insurance requirement. Employers who arrange death cover
outside of superannuation may contribute to funds which do not meet the
insurance requirement, provided the employee for whom superannuation is being
paid is eligible for the employer provided insurance.

In addition, Retirement Savings Accounts are exempted from the requirement to
provide death cover.

Finally there is an exemption if the usual insurer does not offer cover due
to the employee’s health, occupation or hours worked.

Green light to induce employers to switch

In other regulations (the Superannuation Industry (Supervision) Amendment
Regulations 2005) the government has granted several exemptions to the general
rule prohibiting funds form offering a benefit to employers to induce them to
make contributions to that fund. Funds will be able to offer a business loan,
provided it is on a commercial arms length basis and only the employer is
obliged to become a member of the fund. Funds will also be able to offer
clearing house services and other advice to employers without breaching the
“no inducements” rule.

Further choice legislation expected

Minister Brough announced in January this year that employers will be able to
refuse to contribute to a fund, (despite this being the employees preferred
fund) if the fund imposes obligations upon the employer as a participating
employer. Details have not been announced, but it is expected that this will
affect those funds (including most industry funds) which require employers to
make monthly contributions.

In March the Minister announced that the government would extend choice
legislation to cover workers employed under State awards.

Shareholder Activism laws under

Amendments to the Corporations Act (the Corporations Amendment Bill (No 2)
2005 are currently being considered by the government. The amendments are
designed to facilitate shareholder involvement in annual general meetings, while
at the same time restricting the capacity for shareholders to initiate special
meetings of the company.

The Bill would:

  • remove the requirement that companies call a special meeting on the request
    of 100 members, and replace it with a requirement that requests represent five
    per cent of votes that can be cast;
  • reduce the threshold allowing members resolutions to be brought before AGMs,
    and the threshold for distribution of members’ statements from 100 to 20
  • facilitate electronic circulation of members resolutions and statements;
  • require a holder of proxies who exercises a proxy to vote all the proxies
    that they hold, and not “cherry pick” the proxies.

    Some amendments which had been foreshadowed in a previous exposure
    draft of the Bill have been withdrawn, including the requirement for companies
    to annually report on compliance with environmental laws, and removal of
    provisions allowing a single director to call a SGM.

    Affiliates should note that there are two opportunities to make submissions
    regarding this Bill. The Treasurer has released the Bill as an exposure draft
    and submissions can be made to the Department of Treasury by 1 April 2005. In
    addition the Joint Committee on Corporations and Financial Services has
    initiated an inquiry into the Bill, with submissions due 8 April 2005.

    Studies of Australia’s Ageing Population Ignore
    Interface between the Health and Retirement Income Systems

    The Productivity Commission has completed its final report on the Economic
    Implications of an Ageing Australia which will be discussed by the Council of
    Australian Governments. An unfortunate feature of the Commissions interim
    report and the submissions received was that so little attention was paid to the
    interface between the nation’s health system and its retirement income

    The Commission’s report follows on from the Government 2002-2003
    Intergenerational Report and the theme of an ageing population was central to
    the OECD’s 2004 country study of Australia. The main message of these
    three studies is that over the next 40 years the proportion of the Australian
    population over the age of 65 will double to around 25%. Over the same period
    the ageing of the population will be associated with a reduction in the
    proportion of the workforce that has a job or is looking for one from close to
    64% today to around 54%. The average expenditure per year on health and age
    care services for people over 65 is almost four times more than for those under
    65 and six to nine times higher for older groups.

    As a result the Australian government expects that health (particularly the
    cost of pharmaceuticals) and aged care spending may rise by more than 5% of GDP.
    As the OECD put it; (in the absence of alternative solutions):

    “To prevent public financing from going into chronic deficit in the
    longer term, public services would need to be cut or taxes raised by 5 per cent
    of GDP to finance in the 2040’s the same level of access to publicly
    funded services as those provided today.”

    Of course many of the assumption of these reports can be challenged.
    However, virtually the only reference to superannuation concerned how
    Governments were funding the super liabilities for their own employees. For the
    OECD retirement incomes were less a problem for Australia than other countries
    because the old age pension at 25% of male total average weekly earnings placed
    a minimal burden on future Australian Governments.

    An important submission was made by IFSA. It focused on the Retirement
    Savings Gap which measures the difference between the living standards people
    expect to have in retirement and what it will actually be, based on
    superannuation savings and pension.

    To close the gap IFSA emphasised the impact of taxation, the need for higher
    contributions as well as the need for additional reforms to the availability of
    retirement income products. It is important that IFSA put the adequacy debate
    back on the agenda. However, with the cost of health services and
    pharmaceuticals expected to escalate over the coming decades the real question
    is how and when this is to be paid for. Unless we consider more closely the
    interface between the health and retirement income systems any improvements in
    retirement income could be more than offset by rising health and pharmaceutical

    Courts Continue To Prosecute Those Responsible For
    Corporate Fraud In America And Australia

    In both America and Australia the courts systems continue to process those
    responsible for the corporate fraud and excesses of the past decade. In the
    United States, Bernard Ebbers, the former CEO of Worldcom was convicted in March
    2005 on nine counts including securities fraud, conspiracy and seven counts of
    false filings to the US Securities and Exchange Commission. The charges carry a
    maximum prison sentence of 85 years.

    Worldcom outdid Enron when the company filed the largest bankruptcy in US
    history in mid 2002, and eventually some $11 billion of accounting
    “irregularities” were exposed through (in the words of the SEC)
    “a scheme directed and approved by its senior management. Worldcom
    disguised its true operating performance by using undisclosed and improper
    accounting that materially overstated its income.”

    Also caught up in the Worldcom scandal were the investment banks who
    continued to sell the company’s bonds when, according to investors, they
    should have known that the company was lying about its finances. Rather than
    face trial in a class action over securities fraud, 15 of the banks, including
    JP Morgan Chase and Citigroup have agreed to a $6 billion settlement. Others
    including auditors Arthur Anderson who were also caught up in the Enron debacle
    are still to face the court on Worldcom related charges as jury selection for
    the trial has just commenced.

    While estimates vary most accounts suggest shareholders lost A$200 billion in
    the Worldcom collapse. The remnants of the company now know as MCI employs
    41,000 people today compared to nearly 100,000 when Worldcom was at its peak.

    As the British magazine the Economist summarised it:

    “As Mr Ebbers contemplates a lengthy prison sentence, he may take
    little comfort from the

    fact that the company he built and then all but ruined is still a going
    concern. But Federal prosecutors will take heart. Mr Ebbers is the biggest
    catch so far from the spate of corporate crime that was exposed as the tech boom
    turned to bust. Later this year or early next, the bosses of Enron will take
    the stand to fight fraud charges related to the demise of the Texan
    energy-trading company. As with Worldcom, the prosecution case will rely
    heavily on the testimony of former employees and prosecutors will be praying for
    a similar result.”

    In Australia, the courts are also attending to corporate collapses as Ray
    Williams, former CEO of HIH Insurance Group awaits sentencing for his role in
    that company’s failure. As journalist Anne Lampe summarised it:

    “during sentencing submissions yesterday, the Crown sought an
    unspecified jail term for Williams for knowingly misleading shareholders and
    note holders. He signed a misleading prospectus for $150 million of securities,
    false 1999 HIH accounts and a 2000 letter of comfort to note holders when he
    either knew several statements or figures were false or should have know they
    were misleading.”

    Like Worldcom in the US, HIH was Australia’s largest corporate crash
    (more than $6 billion).

    Another HIH Director, Rodney Adler, pleaded guilty to charges that could
    carry up to 20 years jail although few believe he will get much if any of that
    when his sentence hearing commences at the end of March. Adler pleaded guilty
    to four charges relating to false dissemination of information to the share
    market and other failure to disclose charges.

    ACSI Releases Report on Termination Payments for

    On March 17 the Australian Council of Superannuation Investors (ACSI)
    released a major research report calling for new practices in how corporations
    provide termination payments for their executives. The report, prepared by
    institutional governance advisor Proxy Australia, follows widespread attention
    to this issue both here and overseas. For example, in December Quarter 2004 the
    Association of British Insurers and the National Association of Pension Funds
    published their joint statement on Best Practice on Executive Contracts and
    Severance as an addendum to ABI’s revised Principles and Guidelines on
    Executive Remuneration.

    The ACSI/Proxy Australia Report also comes after Australia has experienced
    some of the worst excesses in executive termination payments. As the Report

    “… in 2002 five senior executives of AMP departed with close to $12
    million, despite the fact that they had been in office while AMP lost more than
    $13 billion of its market value. Similarly, in 1999 CEO George Trumble received
    a $7.5 million termination payment following AMP’s disastrous hostile
    takeover of GIO. And in 2003, Southcorp’s CEO, Keith Lambert, departed
    with a termination payment of $4.4 million, even though during his 19 months at
    the helm, Southcorp’s shares lost 40 per cent of their value.”

    The evidence discussed in the report suggests that the debate on executive
    severance payments is most advanced in the UK. In the early 1990s in the UK,
    severance arrangements for senior executives on a three-year contract averaged
    two years’ pay plus compensation for the loss of any expected bonus. By
    2001 this had been reduced with departing UK CEOs getting one year’s pay
    (100% of their previous years cash compensation). Constant pressure through
    Government as well as Institutional Investors in the UK have been major forces
    in improving the disclosure of executives’ termination arrangements, in
    limiting the payments made, and through proxy advisors the development of
    sophisticated guidelines on acceptable practices that are influencing how UK
    companies manages this issue.

    The report also notes that at least till the end of 2004 the lack of detailed
    empirical data about the termination arrangements for senior executives of
    listed companies has inhibited an informed debate in Australia. The CLERP 9
    changes to Section 300A of the Corporation Act will mean that much more
    information will be disclosed about the duration and notice requirements of
    executive contracts of employment, as well as termination payments provided for
    under the contract. However, the Act still places unacceptable hurdles on
    institutional investors having a say. For example, a CEO leaving the company
    after seven years would require a payout of more than seven times his or her
    average remuneration over the past three years before such a payout required
    shareholders’ approval.

    In response to the Report, ACSI has suggested the need for company directors
    and regulators to:

  • Stop payments for failure;
  • Excise bonuses from just termination;
  • Reduce the incidence of lump sum payouts through use of monthly payments
    that can be terminated when a departing executive finds a new
  • Make more termination payouts subject to shareholders’
  • Review the merits of a one-year rolling contracts for
  • Bring disclosure of executive service contracts into line with other
  • The release of this report, as well as the coming non-binding votes at
    company’s AGMs on the Remuneration Reports required by CLERP 9 reforms
    will ensure a lively debate on Executive Pay in 2005-2006. Institutional
    investors are indebted to ACSI for commissioning the report and to HESTA for
    initiating the research project.


    CMSF 2005 was held in Hobart with choice of fund the conference theme. The
    sessions were varied, interesting and challenging and the international
    speakers, Carol M Browner of the US based Albright Group and Daniel Barr a
    Swedish economist, good selections by the organising committee.

    Mal Brough, Assistant Treasurer and “Minister for Choice” opened
    the conference and cheerfully reassured us that the government had one objective
    – to maximise the retirement income of all workers. Sceptics, who thought
    that choice of fund had been driven by ideology and the promise to hand over
    workers retirement savings to the big end of town, were immediately

    Minister Brough went on to explain that the introduction of choice would lead
    to workers being more financially literate and therefore better able to take
    control of their retirement.

    For those Australians that are not up to speed with their superannuation
    arrangements by July this year, the regulators were on hand to tell us what
    strategies they had in place to prevent mis-selling by financial planners and to
    stop banks and financial planners offering inducements to employers.

    While ASIC will be checking on dodgy financial planners, it came as a shock
    to conference delegates to learn that neither APRA nor ASIC thought they had
    responsibility for policing arrangements made between employers and banks or
    financial planners. They will be relying on employers and financial planners
    dobbing themselves in when they offer or accept a kick-back.

    The cat is finally out of the bag.

    Everyone agrees that most Australians do not have the knowledge to choose
    their own super fund. The choice of fund regulations are designed to make choice
    easier for employers, who have never wanted choice because it is an
    administrative nightmare. As a result the banks and financial planners will be
    able, perfectly legally, to offer inducements to employers to move their
    workers’ super from low cost industry funds into higher cost and often
    worse performing master trusts.

    But do not expect a scandal similar to what engulfed Britain and Chile. The
    government and banks are too wary of the backlash. The real test will be in five
    years time when surveys reveal that many workers are paying higher fees to
    for-profit master trusts and commissions to financial planners while getting
    lower returns.

    Yet more effective public policy from the Howard government.

    [David Whiteley, ACTU National Superannuation Officer]

    ACTU Superannuation Trustees Forum

    The ACTU is convening a Superannuation Trustee Forum for industry fund
    trustees and senior officials with responsibility for superannuation on May 10
    2005 in Melbourne.

    The forum will include discussions about the choice of fund legislation, the
    new industrial relations environment and the licensing of trustees. An agenda
    and registration form have been attached with this newsletter or for further
    information please contact Jo McNaughton on 03 9664 7383.

    Editorial change at ACTU Super

    We would like to express our thanks to Linda Rubinstein for her dedication
    over the years and wish her well in her future endeavours. Nixon Apple has
    taken on the role of Editor of ACTU Super, to be supported by Cath Bowtell,
    David Whiteley and Katiana Velcek.