A single military superannuation board
Australian Prudential Regulation Authority
In considering possible changes in the governance and administration of military superannuation, the Review Team considered both concerns about current arrangements and the requirements of its proposed new scheme. In doing so, the Review Team has considered closely the report of the Review of Corporate Governance of Statutory Authorities and Office Holders (the Uhrig Report) and the Government’s response to that report in August 2004. Assistance was also provided through the MSBS Board’s submission to the Review and subsequent consultations with the Board.
Following the Government’s response to the Uhrig Report, the Minister for Defence undertook assessments of both the DFRDB Authority and the MSBS Board against the governance templates set out in the Uhrig Report. The only outstanding issue from those assessments is an agreement that the appointment of an independent chairperson of the DFRDB Authority will resolve the lack of separation of duties, responsibilities and accountability inherent in having a Chair who is, ex officio, the Commissioner for Superannuation (the DFRDB Administrator).
The Review Team agrees the current arrangements in this regard are inappropriate, presenting possible conflicts of interest. They also involve constraints on the financing of the administration of superannuation, denying opportunities for competing the supply of these services and possibly restricting the capacity of Defence as well as the Board to oversee the costs and performance of the administrator.
In considering governance arrangements for the proposed new scheme, the Uhrig Report ‘best practice principles’ in relation to Board size, committees, trustee appointment processes, tenure and development, and performance were taken into account.
The DFRDB and MSBS are legislated under the Defence Force Retirement and Death Benefits Act 1973 and the Military Superannuation and Benefits Act 1991, respectively. The MSB Act also provides for the MSB Scheme Trust Deed.
The proposed new scheme should also be established under an Act of Parliament, supported by a Trust Deed. The principle for legislative drafting should be to keep the Act as simple as possible, with details in the Trust Deed (a ‘legislative instrument’ signed by the Minister Assisting the Minister for Defence).
In the Minister’s assessment of the MSBS Board following the Uhrig Report, it was agreed that it continue to operate outside of the governance frameworks established by the Commonwealth Authorities and Companies Act 1997 (CAC Act) and the Financial Management and Accountability Act 1997 (FMA Act). This was due to the unique nature of the scheme and that it was established under its own legislation. This is also considered to be appropriate for the proposed new scheme and board, given the Review Team’s governance model set out below which reinforces the position that the Board should operate with financial independence.
There is a distinct blend of skills and abilities required of superannuation fund trustees under Australian Prudential Regulation Authority (APRA) licensing requirements.
The responsibilities of the proposed scheme will require added capacity not only because of the substantially increased level of funds under management, but also because of the requirement for innovation in product development, marketing and communication.
For military superannuation, as well as these skills and integrity standards, the board needs a blend of experience and knowledge to best serve the military environment, including understanding the unique nature of military service. Therefore, a central consideration of the Review Team is to ensure military superannuation trustees collectively have the legislated skills, knowledge and abilities, as well as an appropriate knowledge of members, ex-members and Defence interests. This, combined with increasing training and development requirements, suggests there are advantages and efficiencies to be gained in forming a single board of trustees with responsibilities for all military superannuation schemes. A new board should assume all responsibilities for management of the DFRDB, MSBS and the proposed new scheme.
Oversight of various functions (including the administration of the DFRDB) would be undertaken by committees as determined by the board. Membership of committees may include appropriate industry experts.
If needed, as an interim step to this arrangement, the DFRDB Authority could be retained in all its current aspects other than the appointment of an independent chairperson.
In line with the Uhrig Report ‘best practice principles’ (suggesting six to nine members), the board should comprise seven trustees one of whom would be an independent chairperson.
The Review Team proposes that the other six trustees should comprise two ‘employer’, two ‘employee’ and two independent trustees. While the normal Superannuation Industry (Supervision) (SIS) requirements suggest that a seven member board should have three employer and three employee trustees, the distinction between employer and employee representatives in the ADF is somewhat artificial. Indeed, a unique feature of military service is the denial of the right to belong to a union. The Review Team believes its proposals are more likely to ensure an appropriately skilled board without disenfranchising either employees or employers.
The Chief of the Defence Force is best placed to nominate trustees with appropriate skills and experience and knowledge of issues impacting current and ex-Service members of the ADF (the ‘employee’ trustees). The Head of Defence’s Personnel Executive is best placed to nominate trustees with appropriate skills and experience and knowledge of issues impacting Defence (the ‘employer’ trustees). These particular arrangements, however, confirm the somewhat artificial distinction between employer and employee representatives.
The Minister for Defence would be responsible for the appointment of all trustees including the two independent trustees and chairperson. In establishing the inaugural military superannuation board, the Minister should seek the advice of the current MSBS Trustees and the Secretary of the Department of Defence, in line with the Uhrig Report ‘best practice principles’, as well as the Chief of the Defence Force and the Head of Defence’s Personnel Executive. This would include advising on potential candidates and their respective capabilities. The Minister should also follow the same process when filling vacancies as they arise.
In exercising the powers of appointment, the Minister will need to be mindful of the collective skills and experience of the board as well as SIS requirements that individual trustees meet fit and proper person tests. That is, across the seven trustees, there is to be an appropriate blend of skills, knowledge and abilities that encompass an understanding of all regulated requirements, entrepreneurial, investment and financial audit skills as well as the capacity to uphold the interests of serving and separated ADF members and Defence.
The new board will need to use committees to help manage its responsibilities, possibly along the following lines:
Whilst meeting any regulated requirements, the new board should be empowered to vary its committee structure as necessary to support the proficient management, administration and investment of the scheme.
As mentioned, the new board would assume responsibility for management of the DFRDB, MSBS and the proposed scheme. It could use a committee structure along the above lines to distribute responsibilities in a way that ensures the board itself focuses primarily on its strategic responsibilities.
Recommendation 9 A single governance structure should be put in place for the DFRDB and MSBS, as well as the new scheme, along the following lines:
a. The structure should be established under legislation, with a Trust Deed for the MSBS and new scheme.
b. There should be a seven member board of trustees comprising two employee representatives, two employer representatives and three independent representatives, including the chairperson.
c. A committee structure is to be determined by the Board to assist with all the Board’s responsibilities for the DFRDB, MSBS and new scheme.
d. Pending establishment of the proposed new governance structure covering all schemes, the DFRDB Authority should have an independent chairperson, appointed by the Minister.
The Review Team understands that the Review of the Role of Government in Superannuation Administration for Australian Government Employees is examining the legislative requirement that ComSuper be the mandated provider of administration services for Commonwealth superannuation schemes. The Review Team is supportive of the view that the new board should be responsible for scheme administration and financially accountable for the costs of that administration. Accordingly, the board should negotiate fees and services directly with the relevant service providers (whether that be ComSuper, the Department of Veterans' Affairs or others) and negotiate funding for those fees directly from the employer sponsor for services funded by the employer sponsor. In addition the board would determine appropriate fees and services. For example, ADF members who have separated and keep their accumulation plan account active via external employer contributions would pay fees to be determined by the board.
During the development of the Review Team’s recommendations APRA was consulted both in terms of the overall scheme design and specific governance arrangements that are being recommended.
An initial preliminary view was provided by APRA on a range of matters and these will need to be pursued as part of the implementation once the Government has decided upon the Review Team’s recommendations. Areas of most interest to APRA included proposals relating to:
· three independents on the seven member Board;
· the new scheme not being a ‘Public Offer’ scheme, despite being open to the family of serving ADF members;
· benefits available from age 55; and
· access to benefits in terminal illness cases.
These, and other matters will need to be pursued with APRA following the Government’s consideration of the Review Team’s recommendations. The Review Team is of the view that the special nature of military service provides enough justification for the recommendations it has made and that none of APRA’s areas of concern are insurmountable. These will need to be dealt with by negotiation with APRA and in the legislative drafting process to ensure compliance with appropriate superannuation legislation.