11.3 What the case studies showed

11.3.1 AustralianSuper

Not all investments will perform well. Nor can a superannuation trustee guarantee the performance of investments. However, the trustee does promise its members that it will act in their best interests and exercise the same degree of care, skill and diligence as a prudent trustee. These are not impossible standards to satisfy even when an investment’s performance is less than is desired. AustralianSuper’s monitoring and management of its indirect investment in Pacific Hydro illustrates that this is so. Similarly, its prompt response to concerns raised by APRA as to the investments underlying cash products was consistent with a trustee discharging its duties.

AustralianSuper’s spending on The New Daily and the Fox and Henhouse campaign is undoubtedly more controversial. Spending on advertising, insofar as it seeks to maintain or increase scale by retaining existing members or attracting new ones or both, may be consistent with the sole purpose test. And just as not every investment will perform well, not every expenditure by a trustee on promotion will achieve the desired result.

AustralianSuper did not seek to defend the Fox and Henhouse campaign solely on the basis that it was a conventional form of advertising that promoted the merits of industry funds to consumers. Mr Silk characterised the advertisement as being directed at protecting the existing default system and thereby maintaining industry funds as the most common default superannuation funds in Australia.

Not every form of political advertising by a superannuation fund will satisfy the trustee’s obligations. Conversely, not every form of political advertising by a superannuation fund constitutes a failure to act in the best interests of members or a use of members’ funds other than in satisfaction of the sole purpose test. Nice questions of judgment are required. The particular advertisement was not directed to AustralianSuper’s particular position. It was, as Mr Silk said, directed to the interests of industry superannuation funds more generally. But AustralianSuper was only one of several contributors to the cost of the advertisement.

I am not persuaded that it was not open to AustralianSuper, as trustee, to conclude that legislative changes were possible and that, if made, those changes would adversely affect its members. This being so, I do not consider that it was shown that the expenditure may have contravened either the best interests or the sole purpose obligations.

I should add that while I have no doubt at all that judging what is and is not an appropriate use of members funds for advertising will in many cases be difficult, I am not persuaded that some more prescriptive law should be made to provide some bright line test. It is better that the tests be those that are now to be applied: best interests and sole purpose. And as a general rule I would expect that most trustees would rightly err on the side of caution. Especially will that be so if regulators properly monitor compliance with the obligations.

11.3.2 Cbus

As I have emphasised many times in this report, a superannuation trustee promises its members that it will act in their best interests and exercise the same degree of care, skill and diligence as a prudent trustee. Just as it must carefully choose how to spend members’ money, it must also take reasonable steps to make sure that its spending achieves the desired results.

On the limited information available, the changes Cbus made to its ‘partnership’ arrangements after the 2015 report are an example of such steps. Having identified that it could not tell whether it was getting what it paid for, Cbus introduced process changes and initiated a review of the relevant program more broadly. That review appears to have led to a more rigorous approach to its commercial relationships, not just with its shareholders but with other organisations as well.

11.3.3 CSF

Paragraph 8 of Prudential Standard SPS 521: Conflicts of Interest required CSF to have a conflicts management framework that ensured that the RSE licensee identified all potential and actual conflicts in the RSE licensee’s business operations, and took all reasonably practicable actions to ensure that potential and actual conflicts were avoided or prudently managed.

CSF purported to manage the conflict raised by Ms Kernahan’s positions at Australian Family by having only the CEO, Mr Pegan, manage the relationship. Robert Clancy’s continued involvement in the relationship between Australian Family and CSF shows that the strategy was not effective. Further, CSF apparently did not even identify the conflict raised by Paul Clancy’s position at Australian Family until asked about it by the Commission.

Both matters suggest that CSF may not have complied with the Prudential Standard. The matter not having been so far drawn to the attention of the regulator, I refer the relevant conduct to APRA, pursuant to paragraph (a) of the Commission’s Terms of Reference for APRA to consider what action it should take.

Separately, the evidence suggested that Robert Clancy incurred significant personal expenses on his corporate credit card. Mr Haysey said that the CSF Board only became aware of a review of his expenses because a note was found in a drawer when responding to the Commission’s enquiries. At least during one period, Mr Clancy approved his own expenses, and there was a longstanding practice at CSF of using corporate cards for personal use in breach of internal policies.

CSF’s corporate credit cards are funded from money ultimately received from members. Their use should be carefully monitored and controlled. CSF did not, or could not, ensure that was the case. Its failure to do so fell below community standards and expectations.