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
fund.
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
funds
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
consideration
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:
of 100 members, and replace it with a requirement that requests represent five
per cent of votes that can be cast;
and the threshold for distribution of members’ statements from 100 to 20
members;
and
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
system.
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
costs.
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
Executives
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
notes:
“… 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:
that can be terminated when a departing executive finds a new
position;
approval;
executives;
jurisdictions.
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 ROUND-UP
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
converted.
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.
