A former adviser to superannuation trustees has sounded the alarm on what he describes as “serious deficiencies” within the system, urging regulators to take immediate action.
Speaking with Super Review sister brand InvestorDaily, retired barrister and former member of the Superannuation Complaints Tribunal, Noel Davis, said key flaws in the administration of superannuation demand urgent attention from authorities.
One key concern, Davis said, is the widespread use of members’ funds for advertising, promotions, and sponsorships by large superannuation trustees – a practice that has persisted for years.
Citing recent APRA data showing that funds spent $423 million on such activities in a single year, Davis questioned the value to members, saying the money would be better directed towards improving the system’s “badly lacking” service standards.
“The effect of the legislation that governs trustees is that those amounts can only be spent if it is in the best financial interests of the current members to do so, that being the fundamental obligation of trustees under the legislation,” he said. “Regrettably, the regulators, APRA and ASIC, have not been enforcing the law in relation to this expenditure.”
According to Davis, the expense is only in members’ best financial interests if trustees can show it lowers fees for existing members or provides them with a clear financial benefit – something most trustees can’t demonstrate.
“Sponsorships are particularly questionable as to whether the money spent on them is in the members’ best financial interests because it is claimed that they are more of benefit to the fund’s executives in being able to attend functions and sporting events as a sponsor,” he said.
Addressing the contentious issue of super fund payments to trade unions, Davis said: “Other than payment of directors’ fees to the unions who provide directors to the trustee board, it is not apparent how such payments are in the best financial interests of the current members.
“Where members’ money is spent in a way that is not in their financial interests, it is a breach of the law and the regulators should be enforcing it, but they haven’t been.”
A separate issue raised by Davis is that despite a legislative ban introduced in 2022, members of several large industry super funds are still bearing the cost of penalties imposed on their trustees.
He said that despite the legislative amendments – which took effect on 1 January 2022 – explicitly prohibiting trustees from using members’ assets to pay fines resulting from trustee misconduct, trustees of several major funds – including QSuper, AustralianSuper, and Cbus – have successfully applied to state courts to amend their trust deeds.
These changes allow them to charge members’ fees to build reserves, which can then be used to pay penalties. While trustees disclosed this purpose to the courts, critics said the approach circumvents the law by achieving indirectly what is now prohibited directly.
Courts justified these decisions by saying it was in members’ best financial interests to prevent trustees from becoming insolvent due to penalty payments.
But Davis has challenged this rationale, saying that allowing trustees to offload penalty costs onto members undermines the very purpose of the 2022 reform and fails to hold trustees accountable for wrongdoing.
“If a trustee goes into liquidation as a result of becoming insolvent, that is not an outcome which justifies a decision that is not in the members’ best financial interests, as a replacement trustee can readily be appointed. It is not unusual for a trustee to be replaced by another,” he said.
Davis called on legislative intervention to close the loophole and protect fund members from being penalised twice – first by trustee misconduct and then by bearing the financial consequences.
Until then, he said, regulators are acting contrary to members’ interests.
“A solution is that the regulators should not be imposing or asking the courts to impose penalties on trustees where the regulators know that the penalties will effectively be paid by the members,” Davis said.
“An argument that imposing penalties in these circumstances is no different to penalties imposed on companies is misconceived,” he said, adding that in the latter scenario “the penalty is paid by the company which has transgressed and not by the shareholders”.
A similar problem exists in relation to compensating members who suffer a detriment because of something done or not done by the trustee, Davis said.
“If the trustee does not have funds of its own, it’s the members of the fund who pay the compensation by it being debited directly to their accounts or by their accounts being debited with, or their earnings being reduced by, amounts transferred to reserves from which compensation is paid,” Davis said, calling the procedure “bizarre”.
Ultimately, Davis said, these issues demonstrate that “there are some serious deficiencies in the administration of the superannuation system”.
“They need to be addressed, including by the regulators who are enforcing the law,” Davis said.
