Trustee Obligations and Prudential Standards

Mr FLETCHER (Bradfield) (11:09): I think we should focus very carefully on what the minister has just said, because it reveals the fundamental flaw in logic which underpins proposed section 29VN, which the opposition's amendment proposes to remove from the bill. What the minister said to the House just now is that this provision sends a clear signal to small poor-performing funds.

Note very carefully the way he put together two different concepts: small and poor performing. If you listen to the minister, you hear that 'small' and 'poor performing' are effectively the same thing. But of course they are not. The difficulty with what the minister proposes and the difficulty with the bill, which the minister has brought into the House, is that this provision will not just send a signal to small poor-performing funds; it will send a signal to all small funds—well-performing small funds and poor-performing small funds. The policy problem with that is that a consequence of this provision is that funds which are small and which perform well may end up finding themselves pushed into a course of action which, arguably, is not in the interests of fund members. It is hard to avoid noting the kind of language which is used in the explanatory memorandum, in paragraph 1.27, where the author refers to the obligation on trustees:

… to rectify the insufficiency so they continue to meet their general obligation to promote the financial interests of beneficiaries.

If you are putting a provision into legislation, if you are making it part of the black-letter law of this country and if you are imposing formal legal obligations on trustees with all the consequences that go with that, you need to be sure that the policy basis for imposing that obligation is a good one. We have heard no argument from the minister as to why the policy basis for imposing this obligation is a good one. We heard from the minister that the scale test is a good idea because the Cooper review says it is a good idea. There is much in the Cooper review which contains merit, but it is surely not appropriate for this House of Representatives—the people's house—to abdicate its function of bringing to bear an independent judgment, an independent exercise of weighing up the merits and the disadvantages of pieces of legislation which are brought to the House. That, in effect, is what the minister is asking us to do this morning, because he is arguing: 'The scale test is a good idea because the Cooper review says it's a good idea.'

I do not find that argument persuasive. I believe that our obligation in the House of Representatives is to consider the merits of the idea. Let us just remind ourselves of the idea which is embodied in this provision, which the opposition's amendment seeks to remove. The idea is that bigger is better. The idea is that scale in superannuation funds is a good thing. If that were not the underpinning idea, this provision would not be here. The reason the opposition object to baking this in to black-letter law is that that idea is deeply contentious.

There are advantages to scale but there are also advantages to being small and nimble. Smaller investment funds can take advantage of investment opportunities which are not available to very large funds. Smaller funds have the capacity to invest, for example, in small companies which may produce better returns. However, it is a well-known problem in investment management that very big funds are, in practical terms, precluded from investing in small companies because the minimum size of investment they need to make for it to make a difference to their members is so big that it is impractical for them to take a stake of that size in a small company. So there are good arguments in economic theory and policy as to why scale is not an unmitigated advantage, and that is why we say the idea underpinning this provision is a bad one.

Mr SHORTEN: Sometimes in this place the opposition twist what the government says and you let it go through to the keeper because that is their DNA. But in this case I cannot allow that to be so. I accept that the member for Bradfield was not here to hear my second reading speech so he may be unaware that I made it very clear that small funds are not automatically worse than big funds. Indeed, in response to the contribution from the member for Dunkley, I made it very clear and I used the term 'small, well-performing funds'. We will be able to demonstrate that size is not impeding them. But despite the verballing by the opposition and the incorrect portrayal of what the government said in the speech, what I also know to be the case is that the Cooper review, which was an independent review—far more independent than the Liberal member for Bradfield—came to the conclusion that scale can be a factor in operating costs and economies of scale do exist. That is not to say that small funds should not be present in the market. I accept that small funds do provide some of the opportunities the member for Bradfield enunciated. What I do not accept is that we can simply dismiss this review and say, 'We're the people's house and we do not have to follow an independent review because it is being conducted.' That is true. That is very true.

What I also know to be the case is that it was put by members opposite that somehow the government is going in a different direction from what the industry believes. Clearly the Cooper review, which represents a lot of points of view in the industry, did have a distinct view which is in alignment with the government. Therefore, when we talk about the government acting on its own, that is not correct. People say that, if you have a requirement for trustees to periodically consider scale, that is somehow an assault on small funds. That is not correct. It is put to us that we say big funds are better than small funds. That is not what the government has said. What we do recognise is that we have an obligation to constantly and relentlessly seek the cheapest possible costs in the administration of superannuation and exert downward pressure on the fees and charges. I also note that, despite the reservations expressed by those opposite, I have not yet heard their position. Do they regard this requirement to consider scale as sufficiently important that, if they are unsuccessful in that amendment, they will turn their backs on the rest of the propositions on trustee governance? I sincerely hope not.

Mr «FLETCHER»: There is a curious logical contradiction in what the minister is saying to the House this morning. He has just told us that the government do not say big is better than small. Well, if you do not say that, do not put a provision to that effect into the legislation. It is very simple. Let us be clear. Trustees of superannuation funds have an extremely comprehensive and extensive range of duties. There can be no question that superannuation fund trustees today have extensive legal duties to act in the best interests of members of the fund. The proposition from the minister that what we need to do on this specific point is buttress the existing law by adding in a specific obligation to consider scale is one that we should therefore test very carefully. We should only expand upon the existing black letter law duties of trustees of superannuation funds if a very good case is made out for that change.

When you look at the merits of the argument, it is clear that scale has pros and cons. Yet we have an amendment put by the government, a provision in the bill, which assumes that scale is an absolute good. It asks the trustees of small funds to consider each year whether they are big enough and, if not, to consider whether they should merge. The policy case for that has not been made out. But it is clear that there is one segment of the industry whose interests are very well served by such an amendment, and that is the existing larger funds, particularly the larger industry funds. If you are in charge of, for example, the $43 billion Australian Super, this probably looks like a great idea. If you are the Industry Super Network, representing a range of industry funds including a number of the very large funds, this probably looks a good idea.

But I can tell you that' if an argument of this kind were being made in other industries, you can only imagine the howls of protest that would result. If it were put to the House that there should be a duty every year on the directors of Virgin to determine whether their company was as big as Qantas and, if it was not, to change its business structure accordingly, you can only imagine the howls of protest. If there were a duty imposed every year upon the directors of Bendigo Bank to ask whether their company was as big as Westpac and, if it was not, to pursue a change in business structure accordingly, you can only imagine the howls of protest. And looking at the industry from which I came before I came into the parliament, the telecommunications industry, if it were put into the legislation that there was a duty every year on the directors of AAPT, Primus, Internode and iiNet to ask themselves whether they are as big as Telstra and, if they were not, to pursue a change in their business structure, you can only imagine the howls of protest. You can only imagine the arguments which would be put saying this is a change to the law which suits the interest of the big end of town and the case has not been made out on policy grounds. But that is exactly the position we are in when it comes to this provision of this bill which the government is seeking to have this House pass. This is a bill which suits the interests of the big end of town in the superannuation industry, and that is not a good thing when the policy case for what is being proposed has not been made out. We have nowhere heard from the minister, from the government, a convincing policy case as to why scale is an absolute good. That is why on this side of the House we have moved an amendment which would remove these contentious provisions from the bill. We would remove the contentious proposed section 29VN because it is based on an underlying policy idea the case for which has not been made out. When the peak body representing superannuation trustees has expressly put the view that it is misconceived and it is based on an improper prioritisation of the objectives which ought to be motivating superannuation trustees, then we on this side of the House have very profound reservations and it is those reservations which underpin the amendment we have put.