At the heart of the problem was an inability to agree on which trustees from both boards would form the board of the merged entity.
THE shock collapse of the $10 billion merger of two of the country's oldest super funds, Equipsuper and Vision Super, a month before they were due to vote to complete the deal highlights yet again the archaic governance standards in the $1.3 trillion superannuation industry.
The decision to scupper the merger will be a blow to the federal government's efforts to force consolidation of smaller super funds to cut administration costs and lift member returns. It is also a blow to members of both super funds, particularly Vision Super as the bulk of its assets are in a defined benefit fund that has already come under pressure as members retire.
The Victorian-based Equipsuper made the call on Friday after three years of intensive negotiations. That it took Equipsuper so long to walk away epitomises some serious problems lurking in Australia's super system. It also sheds some light on why so few mergers have been consummated and why most mergers take longer than a typical merger discussion, when they should be quicker given they only require board approval.
Equipsuper chairman Andrew Fairley cited a series of factors for the decision, including the Vision Super board's failure to provide essential information, a failure to meet key dates and its breaching and continuously seeking to change several key parts of the memorandum of understanding and the shareholders deed.
But at the heart of the problem was an inability to agree on which trustees from both boards would form the board of the merged entity. Put simply, industry fund boards are made up of an equal number of union-backed trustees and employer-backed trustees, so each representative organisation wants to keep its ratio of spots.
In the case of Equipsuper, which is one of the few democratically elected industry fund boards, this wasn't such a big issue, but it was for Vision Super, which has four representatives from the Australian Services Union and four representatives from employer groups including the Victorian Employers' Chamber of Commerce and Industry, the Victorian Water Industry Association and the Municipal Association of Victoria. Fairley said getting all the organisations on the Vision Super board to agree on the representation on the merged entity was a major roadblock. He warned that other industry fund mergers could face similar problems and he also said this was a key reason the discussions had taken three years and almost failed a year ago.
Last May, Vision Super's union-backed trustees demanded the new board abandon democratic elections and guarantee union-nominated positions. It threatened to pull the deal until the Australian Prudential Regulation Authority was forced to intervene.
While the federal government has made some inroads into cleaning up governance issues in the super industry, including making remuneration more transparent, it has refused to look into the composition of boards, arguably to keep the unions on side. But it is a fundamental issue that needs to be resolved as most industry fund trustees are appointed to the boards in equal numbers by unions and employer groups and cannot be sacked, no matter how incompetent.
Jeremy Cooper in his review into superannuation in 2010 tackled the issue and recommended that industry fund boards be restructured so that a third of directors were independent, a third union representatives and the other third employer reps.
The failed Equipsuper-Vision Super deal shows that as long as the present structure remains in place, industry fund consolidation will be held back by vested interests.
The failure of the deal comes as pressure mounts on funds to create economies of scale ahead of new requirements on super products and investment in information technology upgrades, plus an increased level of regulation.
If the failed merger of Equipsuper and Vision Super doesn't demonstrate plainly enough why change is required, the federal government should consider the shenanigans going on at Energy Industries Superannuation Scheme. In March, Bernie Riordan, a former trustee of EISS and chairman of FuturePlus until April and New South Wales secretary of the Electrical Trades Union until March, wrote to members of the ETU asking them to lobby against a potential tie-up of EISS with State Super and First State.
The EISS became enmeshed in controversy when APRA raised concerns over structural changes and executive departures at FuturePlus, which is EISS' administration arm. The Audit Office of NSW said in an audit opinion of EISS published last year that the fund might have to provide funding to FuturePlus to remain compliant and that trustees might have to consider a merger of the super fund to ensure an efficient structure. ''EISS may need to provide funding to FuturePlus to support infrastructure investments to comply with the proposed Stronger Super regulatory reform,'' the NSW auditor-general said.
The fund's arrangements also triggered a lawsuit last year when ETU state secretary Dean Mighell lodged a statement of claim in the Federal Court seeking the repayment of $1.8 million from Riordan. The lawsuit centred on the fees Riordan collected as a director of the EISS, FuturePlus and another subsidiary, Chifley Financial Services. The claim was withdrawn in February and curiously, a month later, Riordan was appointed a commissioner of Fair Work Australia.
Since the introduction of Fair Work, super funds are written into industrial awards. This means retail funds find it almost impossible to get default fund status. Not so for industry funds.
The country's compulsory super industry was born in the 20th century. It has a lot to be proud of in terms of helping Australians amass so much personal wealth. But in the interests of its owners, vested interests should take a back seat and let the industry live and thrive in the 21st century.