Restricting trustees from making certain investments not in members’ best interests

The Your Future, Your Super (YFYS) bill’s provision of prohibiting or restricting trustees from making certain investments on behalf of members contradicts existing law and prudential standards, according to AustralianSuper.

The superannuation fund’s submission into the Senate Standing Committee on Economic’s YFYS legislation said the Superannuation Industry (Supervision Act) 1993 and prudential standards made under the Act dictated that the formulation of investment strategy and selection of specific investments was the sole responsibility of a fund’s trustee.

Also, Australian Prudential Regulation Authority (APRA) regulated super fund trustees already had a fiduciary duty to act in members’ best financial interests.

“This includes that trustees are responsible for determining an appropriate level of diversification for each investment strategy,” the submission said.

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“The notion that excluding assets from a trustee’s investment universe will improve outcomes is flawed. Further, that such a decision would be made by Parliament via regulation, to apply to all trustees regardless of their investment strategy or members’ investment choices, is not in members’ interests.

“The legislation also does not provide for any transitional provisions to ensure members’ existing investments aren’t adversely impacted as a result of the implementation of the provisions.”

AustralianSuper noted the potential impacts of this provision were quite broad and examples included:

• A restriction could be in direct conflict with the investment choices made by a member.

• The provisions may contradict or constrain a trustee’s investment strategy for an investment option; and

• This could result in the following outcomes:
  
  • The trustee being unable to invest in attractively priced assets that would help meet investment return objectives, denying members the chance of better returns;
  • The trustee being unable to effectively diversify the portfolio against risks, as required under existing law/prudential standards, exposing members to greater risks of loss; and
  • If existing assets are owned by funds that are subsequently prohibited, it could result in the forced sale of assets, which would also expose members to loss of capital.